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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0321760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15415 KATY FREEWAY
HOUSTON, TEXAS 77094
(Address and zip code of principal executive offices)
(281) 492-5300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$2,204,360,325 as of January 31, 1997.
As of January 31, 1997, 68,386,262 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Diamond Offshore Drilling, Inc. Notice of Annual Meeting of
Stockholders and Proxy Statement relating to the 1997 Annual Meeting of
Shareholders, which the Registrant intends to file within 120 days of December
31, 1996, are incorporated by reference in Part III of this form.
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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 8. Financial Statements and Supplementary Data................. 23
Consolidated Financial Statements........................... 24
Notes to Consolidated Financial Statements.................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
Information called for by Part III has been omitted as Registrant
intends to file with the Securities and Exchange Commission not later
than 120 days after the close of its fiscal year a definitive Proxy
Statement pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................... 41
Signatures............................................................ 44
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PART I
ITEM 1. BUSINESS
GENERAL
Diamond Offshore Drilling, Inc., incorporated in Delaware in 1989, engages
principally in the contract drilling of offshore oil and gas wells. Unless the
context otherwise requires, references herein to the "Company" shall mean
Diamond Offshore Drilling, Inc. and its consolidated subsidiaries. The Company's
fleet of mobile offshore drilling rigs is one of the largest in the world and
includes the largest fleet of semisubmersible rigs currently working in the
world. The fleet is comprised of 30 semisubmersibles, 15 jack-ups and one
drillship. In addition, the Company operates a jack-up rig under bareboat
charter, which is currently scheduled to terminate in 1997.
ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES
In February 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent convertible subordinated
notes (the "Notes") due February 15, 2007. The Notes are convertible, in whole
or in part, at the option of the holder at any time following the date of
original issuance thereof and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed, into shares
of the Company's common stock ("Common Stock"), at a conversion price of $81 per
share (equivalent to a conversion rate of 12.346 shares per $1,000 principal
amount of Notes), subject to adjustment in certain circumstances. The Notes are
redeemable, in whole or from time to time in part, at the option of the Company,
at any time on or after February 22, 2001 at specified redemption prices, plus
accrued and unpaid interest to the date of redemption. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity" in Item 7 of this Report.
MERGER WITH ARETHUSA
On April 29, 1996, the Company acquired 100 percent of the common stock of
Arethusa (Off-Shore) Limited ("Arethusa"), a Bermuda corporation (the "Arethusa
Merger") in exchange for shares of Common Stock. Arethusa owned a fleet of 11
mobile offshore drilling rigs, operated two additional mobile offshore drilling
rigs pursuant to bareboat charters and provided drilling services worldwide to
international and government-controlled oil and gas companies. The fleet
consisted of eight semisubmersible rigs and five jack-up rigs. The Company
issued 17.9 million shares of Common Stock based on an exchange ratio of .88
shares for each share of Arethusa's issued and outstanding common stock. See
Note 2 to the Company's Consolidated Financial Statements in Item 8 of this
Report.
COMMON STOCK OFFERING
In October 1995, the Company sold 14,950,000 shares of Common Stock through
an initial public offering (the "Common Stock Offering"), including 1,950,000
shares from an over-allotment option. Loews Corporation ("Loews"), a Delaware
corporation of which the Company had been a wholly-owned subsidiary prior to the
Common Stock Offering, owned 35,050,000 of the outstanding shares of Common
Stock, or 70.1 percent, upon completion of the Common Stock Offering. After the
Arethusa Merger, Loews owns 51.3 percent of the outstanding Common Stock. The
net proceeds of the Common Stock Offering were used to repay all amounts due to
Loews under various borrowing arrangements and to pay a cash dividend to Loews.
See Note 3 to the Company's Consolidated Financial Statements in Item 8 of this
Report.
INDUSTRY CONDITIONS
The Company's business and operations depend principally upon the condition
of the oil and gas industry and, specifically, the exploration and production
expenditures of oil and gas companies. Historically, the offshore contract
drilling industry has been highly competitive and cyclical, with periods of low
demand, excess rig supply and low dayrates followed by periods of high demand,
short rig supply and high dayrates. The offshore contract drilling business is
influenced by a number of factors, including the current and anticipated
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prices of oil and natural gas, the expenditures by oil and gas companies for
exploration and production and the availability of drilling rigs. For a number
of years, depressed oil and natural gas prices and an oversupply of rigs had
adversely affected the offshore drilling market, particularly in the Gulf of
Mexico, where the prolonged weakness and uncertainty in the demand for and price
of natural gas resulted in a significant decline in exploration and production
activities, but such market has improved during 1995 and 1996. Demand for
drilling services outside the U.S. and the North Sea has been less volatile in
recent years, but remains dependent on a variety of political and economic
factors beyond the Company's control, including worldwide demand for oil and
natural gas, the ability of the Organization of Petroleum Exporting Countries
("OPEC") to set and maintain production levels and pricing, the level of
production of non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and natural gas reserves.
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past two years, due
in part to the increasing impact of technological advances that have broadened
opportunities for offshore exploration and development. Both the Gulf of Mexico
and the North Sea semisubmersible markets have experienced increased utilization
and significantly higher dayrates since 1995. All of the Company's markets have
experienced increased utilization and higher dayrates in 1996, and customers
increasingly are seeking to contract rigs for a stated term (as opposed to
contracts for the drilling of a single well or a group of wells). The market for
jack-ups in the Gulf of Mexico, which weakened during 1994, began to stabilize
during 1995 and strengthened significantly in 1996. However, the Company cannot
predict whether and, if so, to what extent these recently improved conditions
will continue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Outlook" in Item 7 of this Report.
THE FLEET
The Company's large, diverse fleet, which includes some of the most
technologically advanced rigs in the world, enables it to offer a broad range of
services worldwide in various markets, including the deep water market, the
harsh environment market (such as the North Sea), the conventional
semisubmersible market and the jack-up market.
Semisubmersibles. The Company owns and operates 30 semisubmersibles.
Semisubmersible rigs consist of an upper working and living deck resting on
vertical columns connected to lower hull members. Such rigs operate in a
"semisubmerged" position, remaining afloat, off bottom, in a position in which
the lower hull is from about 55 to 90 feet below the water line and the upper
deck protrudes well above the surface. The rig is typically anchored in position
and remains stable for drilling in the semi-submerged floating position due in
part to its wave transparency characteristics at the water line.
The Company owns and operates three fourth-generation semisubmersibles and
two semisubmersibles, the Ocean Quest and the Ocean Star, which have recently
been upgraded with fourth-generation capabilities. In addition, the Company is
currently upgrading an additional semisubmersible, the Ocean Victory, to work in
the deep water market of the Gulf of Mexico also with fourth-generation
capabilities. Fourth-generation semisubmersibles are larger than other
semisubmersibles, are capable of working in deep water or harsh environments and
have other advanced features. Currently the Ocean Valiant, the Ocean America and
the Ocean Quest are located in deep water areas of the Gulf of Mexico and the
Ocean Alliance is located in the harsh environment of the North Sea west of the
Shetland Islands. The Ocean Star is preparing for tow to its first drilling
location following the upgrade, which will be in a deep water area of the Gulf
of Mexico. The Ocean Victory is expected to be delivered in the fourth quarter
of 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources" in Item 7 of this Report.
In addition, the Company owns and operates 24 other semisubmersibles
(including five other Victory-class rigs), 21 of which operate in maximum water
depths of between 1,000 to 3,500 feet. The diverse capabilities of most of these
semisubmersibles enable them to work in both shallow and deep water environments
in the U.S. and in most markets outside the U.S. Currently, 13 of these
semisubmersibles are located in the Gulf of Mexico; four are located offshore
Brazil; three are located in the North Sea; two are located offshore Australia;
one is located offshore Malaysia; and one is located offshore South Africa.
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Jack-ups. The Company owns 15 jack-ups and operates one jack-up rig under
bareboat charter, which is currently scheduled to terminate in 1997. Jack-up
rigs are mobile, self-elevating drilling platforms equipped with legs that are
lowered to the ocean floor until a foundation is established to support the
drilling platform. The rig hull includes the drilling rig, jacking system, crew
quarters, loading and unloading facilities, storage areas for bulk and liquid
materials, heliport and other related equipment. Jack-ups are used extensively
for drilling in water depths from 20 feet to 350 feet. The water depth limit of
a particular rig is principally determined by the length of the rig's legs. A
jackup rig is towed by tugboats to the drillsite with its hull riding in the sea
as a vessel with its legs retracted. Once over a drillsite, the legs are lowered
until they rest on the seabed and jacking continues until the hull is elevated
above the surface of the water. After completion of drilling operations, the
hull is lowered until it rests in the water and then the legs are retracted for
relocation to another drillsite.
The principal market for the Company's jack-up rigs is currently the Gulf
of Mexico, where 12 of the Company's jack-up rigs are located. Of the Company's
jack-up rigs in the Gulf of Mexico, six are independent-leg cantilevered rigs,
two are mat-supported cantilevered rigs, two are independent-leg slot rigs, one
is a mat-supported slot rig and one is an independent-leg slot rig that has been
modified with skid-off capability.
Drillship. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either an anchoring system or a computer
controlled thruster (dynamic positioning) system similar to those used on
certain semisubmersible rigs. Drillships normally require water depth of at
least 200 feet in order to conduct operations. The Company's drillship, the
Ocean Clipper I, which uses a conventional anchoring system, is currently being
upgraded to operate in the deep water market of the Gulf of Mexico with dynamic
positioning capabilities and is scheduled to be completed in mid-1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.
Fleet Enhancements. The Company's strategy is to maximize dayrates and
utilization by adapting to trends in its markets, including enhancing its fleet
to meet customer demand for diverse drilling capabilities. The average age of
the Company's fleet of offshore drilling rigs (calculated as of December 31,
1996 and measured from year built) is 18.9 years. Many of the Company's rigs
have been upgraded during the last five years with enhancements such as
top-drive drilling systems, additional water depth capability, mud pump
additions or increases in deck load capacity, and the Company believes that it
will be feasible to continue to upgrade its rigs notwithstanding the average age
of its fleet. However, there can be no assurance as to if, when or to what
extent upgrades will continue to be made to rigs in the Company's fleet. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.
The Ocean Quest, one of the Company's Victory-class rigs, was upgraded to
conduct drilling operations in the Gulf of Mexico in water depths of up to 3,500
feet and the rig was placed into service in September 1996. In March 1997, the
Company completed the major upgrade of the Ocean Star, including stability and
other enhancements such as water depth capabilities of up to 4,500 feet,
increased variable deck load to approximately 6,000 long tons, a top-drive
drilling system, a 15,000 psi blow-out prevention system, increased deck area,
and additional mud pit and tensioner capacity. The Ocean Victory is currently
undergoing an upgrade similar to the Ocean Quest and the Ocean Star which will
enable the rig to conduct drilling operations in water depths of up to 5,000
feet. The Ocean Victory is anticipated to be delivered during the fourth quarter
of 1997. Following the upgrades, the Company believes that these rigs will be
able to compete effectively in the fourth-generation deep water market.
Additional Victory-class upgrade potential exists, including conceptual
plans the Company is developing for the possible construction of an ultra-large
semisubmersible, the Ocean Legend. The Ocean Legend is intended to take
advantage of the cruciform design of the Victory-class semisubmersibles to
"square off" the rig by adding large corner columns and other new equipment to
yield a rig with capabilities beyond a traditional fourth-generation unit at a
significantly reduced cost as compared to new construction. However, there can
be no assurance that the Ocean Legend project will be undertaken by the Company,
particularly in view of current dayrates that would be forgone by removing a rig
from service for upgrade. If such project is
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undertaken, there can be no assurance that the Ocean Legend can be built in a
cost-effective manner, that if a Victory-class rig is so upgraded, there will be
adequate demand for its services, or that competitors will not achieve
capability beyond that of fourth-generation semisubmersibles through other means
attractive to customers.
More detailed information concerning the Company's fleet of mobile offshore
drilling rigs, as of January 31, 1997, is set forth in the table below.
WATER YEAR
DEPTH BUILT/LATEST CURRENT
TYPE AND NAME CAPABILITY(FT.) ATTRIBUTES ENHANCEMENT(a) LOCATION CUSTOMER(b)
------------- --------------- ---------- -------------- ------------------ -----------
FOURTH-GENERATION SEMISUBMERSIBLES(3):
Ocean Alliance........................ 5,000 TDS; DP; 15K; 3M 1988/1995 North Sea Shell
Ocean America......................... 5,000 TDS; SP; 15K; 3M 1988/1992 Gulf of Mexico Exxon
Ocean Valiant......................... 5,000 TDS; SP; 15K; 3M 1988/1995 Gulf of Mexico Exxon
FOURTH-GENERATION DEEP WATER
CONVERSIONS(3):
Ocean Star(c)......................... 4,500 TDS; VC; 15K; 3M 1974/1997 Gulf of Mexico Texaco
Ocean Quest........................... 3,500 TDS; VC; 15K; 3M 1973/1996 Gulf of Mexico Chevron
Ocean Victory(d)...................... 600 VC 1972 Gulf of Mexico Vastar
OTHER SEMISUBMERSIBLES(24):
Ocean Worker(e)....................... 3,500 TDS; 3M 1982/1992 Gulf of Mexico Shell
Ocean Voyager......................... 3,200 TDS; VC 1973/1995 Gulf of Mexico Enserch
Ocean Winner(e)....................... 3,000 TDS; 3M 1977/1996 Gulf of Mexico Chevron
Ocean Yatzy(e)........................ 3,000 TDS; DP; 15K 1989 Brazil Petrobras
Ocean Yorktown(e)..................... 2,850 TDS 1976/1996 Brazil Petrobras
Ocean Concord(e)...................... 2,200 TDS; 3M 1975/1995 Gulf of Mexico Shell
Ocean Lexington(e).................... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Marathon
Ocean Saratoga(e)..................... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Shell
Ocean Endeavor........................ 2,000 TDS; VC 1975/1994 Gulf of Mexico British-Borneo
Ocean Rover........................... 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Amerada Hess
Ocean Prospector...................... 1,700 VC 1971/1981 Gulf of Mexico AGIP
Ocean Bounty.......................... 1,500 TDS; VC; 3M 1977/1992 Australia BHPP
Ocean Guardian........................ 1,500 TDS; SP; 3M 1985 North Sea BP
Ocean New Era......................... 1,500 TDS 1974/1990 Gulf of Mexico LL&E
Ocean Princess........................ 1,500 TDS; 15K 1977/1996 North Sea Mobil
Ocean Whittington(e).................. 1,500 TDS; 3M 1974/1995 Gulf of Mexico Burlington
Ocean Epoch........................... 1,200 TDS 1977/1990 Australia Shell
Ocean General......................... 1,200 TDS 1976/1990 Malaysia Petronas
Ocean Nomad........................... 1,200 TDS 1975/1995 North Sea Shell
Ocean Baroness........................ 1,200 TDS; VC 1973/1995 Brazil Petrobras
Ocean Ambassador...................... 1,100 TDS; 3M 1975/1995 Gulf of Mexico Shell
Ocean Century......................... 800 1973 Gulf of Mexico Stacked
Ocean Liberator....................... 600 1974 South Africa Mossgas
Ocean Zephyr.......................... 600 1972 Brazil Petrobras
JACK-UPS(16):
Ocean Titan........................... 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico CNG
Ocean Tower........................... 350 IS; 3M 1972 Gulf of Mexico Ashland
Ocean King............................ 300 TDS; IC 1973/1989 Gulf of Mexico Chevron
Miss Kitty(e), (f).................... 300 IC 1982 India ONGC
Ocean Nugget.......................... 300 TDS; IC 1976/1995 Gulf of Mexico Texaco
Ocean Summit.......................... 300 SDS; IC 1972/1991 Gulf of Mexico Coastal
Ocean Warwick......................... 300 TDS; IS; SO 1971/1984 Gulf of Mexico Stacked
Ocean Champion........................ 250 MS 1975/1985 Gulf of Mexico LL&E
Ocean Columbia........................ 250 TDS; IC 1978/1990 Gulf of Mexico Anadarko
Ocean Heritage(e)..................... 250 TDS; IC 1981/1995 Indonesia Maxus
Ocean Sovereign(e).................... 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Spartan......................... 250 TDS; IC 1980/1994 Gulf of Mexico Amerada Hess
Ocean Spur............................ 250 TDS; IC 1981/1994 Gulf of Mexico BHP(g)
Ocean Crusader........................ 200 TDS; MC 1982/1992 Gulf of Mexico Chevron
Ocean Drake........................... 200 TDS; MC 1983/1986 Gulf of Mexico Chevron
Ocean Scotian(e)...................... 200 TDS; IC; 15K 1981/1988 Netherlands Elf
DRILLSHIP(1):
Ocean Clipper I(h).................... 1,200 SP 1976 Gulf of Mexico BP
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ATTRIBUTES
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DP = Dynamically Positioned/Self-Propelled MS = Mat-Supported Slot Rig TDS = Top-Drive Drilling System
IC = Independent-Leg Cantilevered Rig SDS = Side-Drive Drilling VC = Victory-Class
System
IS = Independent-Leg Slot Rig SO = Skid-Off Capability 3M = Three Mud Pumps
MC = Mat-Supported Cantilevered Rig SP = Self-Propelled 15K = 15,000 psi Blow-Out
Preventer
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(a) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deck load
capacity.
(b) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(c) Committed under a three-year term contract with Texaco in the Gulf of Mexico
upon completion of a major upgrade.
(d) Committed under a three-year term contract with Vastar in the Gulf of Mexico
upon completion of a major upgrade.
(e) Formerly an Arethusa rig.
(f) Operated under bareboat charter, which is currently scheduled to terminate
in 1997.
(g) Managed daywork project operated by Diamond Offshore Turnkey Services
("DOTS").
(h) Committed under a letter of intent for a four-year term contract with BP in
the Gulf of Mexico upon completion of a major upgrade.
MARKETS
The Company's principal markets for its offshore contract drilling services
are the Gulf of Mexico, Europe, including principally the U.K. sector of the
North Sea, South America and Australia/Southeast Asia. The Company actively
markets its rigs worldwide. In the past, rigs in the Company's fleet have also
operated in various other markets throughout the world. See Note 13 to the
Company's Consolidated Financial Statements in Item 8 of this Report.
The Company believes that its presence in multiple markets provides a
competitive advantage. For example, the Company believes that its experience
with safety and other regulatory matters in the U. K. has been beneficial in
Australia and in the Gulf of Mexico and that production experience gained
through Brazilian and North Sea operations has potential application worldwide.
Additionally, the Company believes that its performance for a customer in one
market segment or area enables it to better understand that customer's needs and
serve that customer in different market segments or other geographic locations.
OFFSHORE CONTRACT DRILLING SERVICES
The Company's contracts to provide offshore drilling services vary in their
terms and provisions. The Company often obtains its contracts through
competitive bidding, although it is not unusual for the Company to be awarded
drilling contracts without competitive bidding. Drilling contracts generally
provide for a basic drilling rate on a fixed dayrate basis regardless of whether
such drilling results in a productive well. Drilling contracts may also provide
for lower rates during periods when the rig is being moved or when drilling
operations are interrupted or restricted by equipment breakdowns, adverse
weather or water conditions or other conditions beyond the control of the
Company. Under dayrate contracts, the Company generally pays the operating
expenses of the rig, including wages and the cost of incidental supplies.
Revenues from dayrate contracts have historically accounted for a substantial
portion of the Company's revenues. In addition, the Company has worked some of
its rigs under dayrate contracts pursuant to which the customer also agrees to
pay the Company an incentive bonus based upon performance.
A dayrate drilling contract generally extends over a period of time
covering either the drilling of a single well, a group of wells (a "well-to-well
contract") or a stated term (a "term contract") and may be terminated by the
customer in the event the drilling unit is destroyed or lost or if drilling
operations are suspended for a specified period of time as a result of a
breakdown of major equipment or in some cases due to other events beyond the
control of either party. In addition, certain of the Company's contracts permit
the customer to
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terminate the contract early by giving notice and in some circumstances may
require the payment of an early termination fee by the customer. The contract
term in many instances may be extended by the customer exercising options for
the drilling of additional wells at fixed or mutually agreed terms, including
dayrates.
The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategy of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that give contractors the
flexibility to profit from increasing dayrates. In contrast, during these
periods customers with reasonably definite drilling programs typically prefer
longer term contracts to maintain dayrate prices at the lowest level possible.
Conversely, in periods of decreasing demand for offshore rigs, contractors
generally prefer longer term contracts to preserve dayrates at existing levels
and ensure utilization, while the customers prefer well-to-well contracts that
allow them to obtain the benefit of lower dayrates. In general, the Company
seeks to have a reasonable balance of single well, well-to-well and term
contracts to minimize the downside impact of a decline in the market while still
participating in the benefit of increasing dayrates in a rising market. Although
most of the Company's semisubmersible rigs are committed on a term basis, the
Company's jack-up rigs are primarily committed for short-term single well or
well-to-well arrangements.
The Company, through DOTS, a wholly-owned subsidiary of the Company, offers
a portfolio of drilling and production services to complement the Company's
offshore contract drilling business. These services include overall project
management and drilling and production operations on a turnkey or
modified-turnkey basis. Under a turnkey contract, the drilling contractor agrees
to perform a specified drilling service, such as drilling a well to a specified
depth for a fixed price. Under a turnkey contract, the drilling contractor bears
the financial risk of delays in completion of the project and profitability
depends upon the contractor's ability to keep expenses within estimates used to
determine the contract price. Drilling of a well under a turnkey contract
therefore typically requires a cash commitment in excess of those drilled under
conventional dayrate contracts and exposes the contractor to risks of potential
financial losses that generally are substantially greater than those that would
ordinarily exist when drilling under a conventional dayrate contract. The
financial results of a turnkey contract depend upon the performance of the
drilling unit, drilling conditions, and other factors, some of which are beyond
the control of DOTS. However, during 1996, DOTS primarily provided project
management services on a dayrate basis that are not accompanied by the
substantial risks of turnkey contracts. For the year ended December 31, 1996,
DOTS contributed $2.5 million of operating income to the Company's consolidated
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" in Item 7 of this
Report.
The Company may also seek alternative uses for the rigs in its fleet that
are no longer competitive in the drilling market and do not meet the Company's
criteria for modification. Such alternative uses may include employment of these
rigs as mobile offshore production units or as a part of floating production
systems. These operations have not been a significant part of the Company's
business.
DISPOSITION OF ASSETS
During 1996, the Company's bareboat charter of a jack-up drilling rig
acquired in the Arethusa Merger terminated and the Company no longer operates
this rig. In addition, in 1996, the Company sold two shallow water jack-ups and
one semisubmersible, each of which was inactive. In December 1996, the Company
exited the land drilling business with the sale of its land rigs and associated
equipment for approximately $26.0 million, resulting in an after-tax gain for
the year ended December 31, 1996 of $15.6 million or $0.25 per share. The assets
sold consisted of ten land drilling rigs, 18 trucks, a yard facility and various
other equipment.
CUSTOMERS
The Company provides offshore drilling services to a customer base that
includes major and independent oil and gas companies and government-owned oil
companies. Occasionally, several customers have accounted for 10.0 percent or
more of the Company's annual consolidated revenues, although the identity of
such customers may vary from year to year. During 1996, the Company performed
services for approximately 80 different customers and Shell Oil Company and
British Petroleum Co., PLC ("BP") accounted for
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13.8 percent and 13.5 percent of the Company's annual total consolidated
revenues, respectively. During 1995, the Company performed services for
approximately 90 different customers and BP accounted for 16.5 percent of the
Company's annual total consolidated revenues. During 1994, the Company performed
services for approximately 90 different customers and no single customer
accounted for more than 8.2 percent of the Company's annual total consolidated
revenues. Management believes that at current levels of activity the Company has
alternative customers for its services such that the loss of a single customer
would not have a material adverse effect on the Company.
The Company's services are marketed principally through its Houston office,
with support from its regional offices in New Orleans, Louisiana; Aberdeen,
Scotland; Perth, Australia; Macae, Brazil; Jakarta, Indonesia; and Singapore.
Technical and administrative support functions for the Company's operations are
provided by its Houston office.
COMPETITION
The contract drilling industry is highly competitive. Customers often award
contracts on a competitive bid basis, and although a customer selecting a rig
may consider, among other things, a contractor's safety record, crew quality and
quality of service and equipment, the historical oversupply of rigs has created
an intensely competitive market in which price is the primary factor in
determining the selection of a drilling contractor. However, due to the recent
escalation of drilling activity, rig availability has, in some cases, also
become a consideration. The Company believes that competition for drilling
contracts will continue to be intense in the foreseeable future. Contractors are
also able to adjust localized supply and demand imbalances by moving rigs from
areas of low utilization and dayrates to areas of greater activity and
relatively higher dayrates. In addition, there are inactive non-marketed rigs or
rigs being operated in non-drilling activities that could be reactivated to meet
an increase in demand for drilling rigs in any given market. Such movements or
reactivations or a decrease in drilling activity in any major market could
depress dayrates and could adversely affect utilization of the Company's rigs.
See "-- Offshore Contract Drilling Services."
In addition, the recent improvement in the current results of operations
and prospects for the offshore contract drilling industry as a whole has led to
increased rig construction and enhancement programs by the Company's competitors
and, if present trends continue for an extended period, may lead to new entrants
into the market. A significant increase in the supply of technologically
advanced rigs capable of drilling in deep water may have an adverse effect on
the average operating dayrates for the Company's rigs, particularly its more
advanced semisubmersible units, and on the overall utilization level of the
Company's fleet. In such case, the company's results of operations would be
adversely affected.
GOVERNMENTAL REGULATION
The Company's operations are subject to numerous federal, state and local
environmental laws and regulations that relate directly or indirectly to its
operations, including certain regulations controlling the discharge of materials
into the environment, requiring removal and clean-up under certain
circumstances, or otherwise relating to the protection of the environment. For
example, the Company may be liable for damages and costs incurred in connection
with oil spills for which it is held responsible. Laws and regulations
protecting the environment have become increasingly stringent in recent years
and may in certain circumstances impose "strict liability" rendering a company
liable for environmental damage without regard to negligence or fault on the
part of such company. Such laws and regulations may expose the Company to
liability for the conduct of or conditions caused by others, or for acts of the
Company that were in compliance with all applicable laws at the time such acts
were performed. The application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company.
The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states address oil
spill prevention and control and significantly expand liability exposure across
all segments of the oil and gas industry. OPA '90, such similar legislation and
related regulations impose a variety of obligations on the Company related to
the prevention of oil spills and liability for damages resulting from such
spills. OPA '90 imposes strict and with limited exceptions joint and several
7
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liability upon each responsible party for oil removal costs and a variety of
public and private damages. OPA '90 also imposes ongoing financial
responsibility requirements on a responsible party. A failure to comply with
such ongoing requirements or inadequate cooperation in a spill may subject a
responsible party, including in some cases the Company, to civil or criminal
enforcement action. OPA '90 also requires the U.S. Minerals Management Service
to promulgate regulations to implement the financial responsibility requirements
for offshore facilities. If implemented as written, the financial responsibility
requirements of OPA '90 could have the effect of significantly increasing the
amount of financial responsibility that oil and gas operators must demonstrate
to comply with OPA '90. While industry groups and marine insurance carriers are
seeking modification of these requirements, implementation of these requirements
in their current form could adversely affect the ability of some of the
Company's customers to operate in U.S. waters, which could have a material
adverse effect on the Company.
The Federal Water Pollution Control Act of 1972, commonly referred to as
the Clean Water Act ("CWA"), prohibits the discharge of certain substances into
the navigable waters of the U.S. without a permit. The regulations implementing
the CWA require permits to be obtained by an operator before certain exploration
or drilling activities occur. Violations of monitoring, reporting and permitting
requirements can result in the imposition of civil and criminal penalties. The
provisions of the CWA can also be enforced by citizens' groups. Many states have
similar laws and regulations.
The Outer Continental Shelf Lands Act authorizes regulations relating to
safety and environmental protection applicable to lessees and permittees
operating on the Outer Continental Shelf. Specific design and operational
standards may apply to Outer Continental Shelf vessels, rigs, platforms,
vehicles and structures. Violation of lease terms relating to environmental
matters or regulations issued pursuant to the Outer Continental Shelf Lands Act
can result in substantial civil and criminal penalties as well as potential
court injunctions curtailing operations and the cancellation of leases. Such
enforcement liabilities can result from either governmental or citizen
prosecution.
INDEMNIFICATION AND INSURANCE
The Company's operations are subject to hazards inherent in the drilling of
oil and gas wells such as blowouts, reservoir damage, loss of production, loss
of well control, cratering or fires, the occurrence of which could result in the
suspension of drilling operations, injury to or death of rig and other personnel
and damage to or destruction of the Company's, the Company's customer's or a
third party's property or equipment. Damage to the environment could also result
from the Company's operations, particularly through oil spillage or uncontrolled
fires. In addition, offshore drilling operations are subject to perils peculiar
to marine operations, including capsizing, grounding, collision and loss or
damage from severe weather. The Company has insurance coverage and contractual
indemnification for certain risks, but there can be no assurance that such
coverage or indemnification will adequately cover the Company's loss or
liability in many circumstances or that the Company will continue to carry such
insurance or receive such indemnification. Except with respect to its
fourth-generation semisubmersibles, the Company does not maintain business
interruption insurance and may elect to discontinue this coverage for its
fourth-generation semisubmersibles at any time.
OPERATIONS OUTSIDE THE UNITED STATES
Operations outside the United States accounted for approximately 37.1
percent, 36.4 percent and 34.0 percent of the Company's total consolidated
revenues from unaffiliated customers for the years ended December 31, 1996, 1995
and 1994, respectively. The Company's non-U.S. operations are subject to certain
political, economic and other uncertainties not encountered in U.S. operations,
including risks of war and civil disturbances (or other risks that may limit or
disrupt markets), expropriation and the general hazards associated with the
assertion of national sovereignty over certain areas in which operations are
conducted. The Company's operations outside the United States may face the
additional risk of fluctuating currency values, hard currency shortages,
controls of currency exchange and repatriation of income or capital. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other -- Currency Risk" in Item 7 of this Report. No prediction
can be made as to what governmental regulations may be enacted in the future
that could adversely affect the international drilling industry.
8
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EMPLOYEES
As of December 31, 1996, the Company had approximately 3,770 employees
(including international crews furnished through labor contractors),
approximately 160 of whom were union members. The Company has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees. The Company does not consider the possibility of a shortage of
qualified personnel to be a material factor in its business. However, because
the demand for oil field services is increasing rapidly, retention of qualified
people is likely to become more difficult without significant increases in
compensation.
ITEM 2. PROPERTIES.
The Company owns an eight-story office building containing approximately
182,000 net rentable square feet on approximately 6.2 acres of land located in
Houston, Texas, where the Company has its corporate headquarters, an 18,000
square foot building and 20 acres of land in New Iberia, Louisiana for its
offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. The Company also owns a warehouse facility on approximately 6.6
acres of land near Houston, Texas which was acquired through the Arethusa Merger
and which the Company plans to sell. Also, the Company currently leases various
office, warehouse and storage facilities and lots in Louisiana, Scotland,
Australia, Malaysia, Singapore, Indonesia, India, the Netherlands and Brazil to
support its offshore drilling operations.
ITEM 3. LEGAL PROCEEDINGS.
Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the 334th
Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs have sued Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract. Plaintiffs seek $14.0 million in actual
damages and unspecified punitive damages, plus costs of court, interest and
attorney's fees. A former subsidiary of Arethusa, which is now a subsidiary of
the Company, is defending and indemnifying the Zapata Defendants pursuant to a
contractual defense and indemnification agreement. The Company believes the
Zapata Defendants have adequate defenses and intends to vigorously defend their
position.
The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. For a description
of one such lawsuit, see Note 8 to the Company's Consolidated Financial
Statements in Item 8 of this Report. Although the outcome of lawsuits or other
proceedings involving the Company and its subsidiaries cannot be predicted with
certainty and the amount of any liability that could arise with respect to such
lawsuits or other proceedings cannot be predicted accurately, management does
not expect these matters to have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
In reliance on General Instruction G(3) to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The executive
officers of the Company are elected annually by the Board of Directors to serve
until the next annual meeting of the Board of Directors, or until their
successors are duly elected and qualified, or until their earlier death,
resignation, disqualification or removal from office. Information with respect
to the executive officers of the Company is set forth below.
AGE AS OF
NAME JANUARY 31, 1997 POSITION
---- ---------------- --------
Robert E. Rose............ 58 President, Chief Executive Officer and Director
Lawrence R. Dickerson..... 44 Senior Vice President and Chief Financial
Officer
David W. Williams......... 39 Senior Vice President -- Contracts and
Marketing
Richard L. Lionberger..... 46 Vice President, General Counsel and Secretary
Gary T. Krenek............ 38 Controller
Robert E. Rose has served as President and Chief Executive Officer of the
Company and as a director since June 1989.
Lawrence R. Dickerson has served as Senior Vice President of the Company
since April 1993 and has served as a Vice President and the Chief Financial
Officer of the Company since June 1989.
David W. Williams has served as Senior Vice President of the Company since
December 1994 and was a Marketing Vice President between February 1992 and May
1994. Mr. Williams was employed by Noble Drilling Corporation, a contract
drilling company, from May 1994 through December 1994 as Vice President of
Marketing.
Richard L. Lionberger has served as Vice President, Secretary and General
Counsel of the Company since February 1992.
Gary T. Krenek has served as Controller of the Company since February 1992.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "DO". The following table sets forth, for the calendar
quarters indicated, the high and low closing prices of Common Stock as reported
by the NYSE. No information is provided for Common Stock prior to the date of
the Common Stock Offering.
COMMON STOCK
-------------
HIGH LOW
---- ---
1996
First Quarter............................................... $433/8 $333/8
Second Quarter.............................................. 57 431/2
Third Quarter............................................... 581/8 47
Fourth Quarter.............................................. 643/8 541/4
1995
Fourth Quarter.............................................. $34 $24
On January 31, 1997, the closing price, as reported by the NYSE, was
$66 1/8 per share. As of January 31, 1997, there were approximately 86 holders
of record of Common Stock. This number does not include the stockholders for
whom shares are held in a "nominee" or "street" name.
DIVIDEND POLICY
There were no cash dividends declared for 1996 or 1995, except for a $2.1
million special dividend paid to Loews in 1995 in connection with the Common
Stock Offering. See Note 3 to the Company's Consolidated Financial Statements in
Item 8 of this Report. Any future determination as to payment of dividends will
be made at the discretion of the Board of Directors of the Company and will
depend upon the Company's operating results, financial condition, capital
requirements, general business conditions and such other factors that the Board
of Directors deems relevant. In addition, the payment of cash dividends is
limited by the terms of the Company's revolving credit facility with a group of
banks (the "Credit Facility"). At December 31, 1996, the Company could have
declared and paid dividends of $25.0 million in the aggregate within the
limitations of the Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity" in Item 7 and Note 7
to the Company's Consolidated Financial Statements in Item 8 of this Report.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data relating to the Company. The selected consolidated financial data are
derived from the financial statements of the Company as of and for the periods
presented. The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the Company's Consolidated Financial
Statements (including the Notes thereto) in Item 8 of this Report.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996(1) 1995 1994 1993 1992(2)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenues............................................. $611,430 $336,584 $307,918 $288,069 $214,885
Operating expenses:
Contract drilling........................................ 341,654 259,560 256,919 228,211 199,201
Depreciation (3)......................................... 75,767 52,865 55,366 46,819 49,667
General and administrative............................... 15,640 13,857 11,993 11,785 15,401
Gain on sale of assets................................... (35,122) (1,349) (1,736) (3,201) (231)
Operating income (loss).................................... 213,491 11,651 (14,624) 4,455 (49,153)
Interest expense........................................... (2,326) (27,052) (31,346) (25,906) (28,591)
Other income (expense), net................................ 1,540 1,598 (455) (219) (207)
Income tax (expense) benefit (4)........................... (66,317) 6,777 11,621 5,041 24,575
Net income (loss).......................................... 146,388 (7,026) (34,804) (16,629) (53,376)
Net income per share....................................... 2.35 -- -- -- --
Weighted average shares outstanding........................ 62,231 -- -- -- --
Pro forma net income per share (5)......................... -- 0.20 -- -- --
OTHER FINANCIAL DATA:
Capital expenditures (6)................................... $267,000 $ 66,646 $ 21,146 $ 14,345 $ 16,214
EBITDA (7)................................................. 254,136 63,167 39,006 48,073 283
Cash provided by (used in) operating activities (8)........ 207,822 52,781 42,562 32,904 (12,164)
Ratio of earnings to fixed charges (9)..................... 31.56x -- -- -- --
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.......................................... $ 114,967 $ 63,523 $ 57,521 $ 52,904 $ 35,391
Drilling and other property and equipment, net........... 1,198,160 502,278 488,664 498,740 478,454
Goodwill, net (1)........................................ 129,825 -- -- -- --
Total assets............................................. 1,574,500 618,052 588,158 592,162 582,418
Long-term debt (10)...................................... 63,000 -- 394,777 353,483 233,216
Stockholders' equity (11)................................ 1,194,732 492,894 124,066 158,361 275,300
- ---------------
(1) The Company acquired all of the common stock of Arethusa in consideration
of 17.9 million shares of Common Stock effective April 29, 1996. See Note 2
to the Company's Consolidated Financial Statements in Item 8 of this
Report.
(2) The Company acquired all of the common stock of Odeco Drilling Inc. for
approximately $376.6 million in cash effective January 1, 1992.
(3) Effective January 1, 1996 and 1993, the Company revised the estimated
useful lives for certain classes of its offshore drilling rigs. The
estimated useful lives of the Company's offshore drilling rigs, after the
change in estimate, range from 10 to 25 years. As compared to the original
estimate of useful lives, this change resulted in a reduction of
approximately $8.5 million and $6.3 million in depreciation expense during
1996 and 1993, respectively, and a corresponding increase in operating
income.
(4) Prior to the Common Stock Offering, the Company was included in the
consolidated U.S. federal income tax return of Loews. Effective January 1,
1992, a tax sharing agreement with Loews was adopted to allow for the
recognition of expenses and benefits related to taxable income and losses
as if the Company filed a separate consolidated return. In conjunction with
the Common Stock Offering, the tax sharing agreement was terminated and all
assets and liabilities were settled by offsetting these amounts
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against notes payable to Loews. For taxable periods subsequent to the
Common Stock Offering, the Company has filed a consolidated U.S. federal
income tax return on a stand-alone basis.
(5) Pro forma net income per share gives effect to the Common Stock Offering
and the after-tax effects of a reduction in interest expense. Assuming the
Common Stock Offering had occurred at January 1, 1995, the Company would
have recognized net income of $10.0 million, or $0.20 per share of Common
Stock, after adjusting for the after-tax effects of a reduction in interest
expense. See Note 1 to the Company's Consolidated Financial Statements in
Item 8 of this Report.
(6) In addition to these capital expenditures, the Company expended $550.7
million in equity consideration and $25.0 million, $10.6 million, and
$410.9 million in cash for rig acquisitions during the years ended December
31, 1996, 1994, 1993, and 1992, respectively. No amounts were expended for
rig acquisitions during the year ended December 31, 1995.
(7) EBITDA (operating income (loss) plus depreciation minus gain on sale of
assets) is a supplemental financial measure used by the Company in
evaluating its business and should be read in conjunction with all of the
information in the Selected Financial Data as well as the Company's
Consolidated Financial Statements (including the Notes thereto) included in
Item 8 of this Report prepared in accordance with generally accepted
accounting principles. EBITDA should not be considered as an alternative to
operating income (loss) or cash flow from operations as an indication of
the Company's performance or as a measure of liquidity.
(8) See the Company's Consolidated Financial Statements (including the Notes
thereto) in Item 8 of this Report.
(9) The deficiency in the Company's earnings available for fixed charges for
the years ended December 31, 1995, 1994, 1993 and 1992 was approximately
$13.8 million, $46.4 million, $21.7 million, and $78.0 million. Fixed
charges for the years ended December 31, 1992 through December 31, 1995
consisted primarily of interest expense on notes payable to Loews. For all
periods presented, the ratio of earnings to fixed charges has been computed
on a total enterprise basis. Earnings represent income (loss) from
continuing operations plus income taxes and fixed charges. Fixed charges
represent interest, whether expensed or capitalized.
(10) Long-term debt consisted solely of notes payable to Loews for the years
ended December 31, 1994, 1993 and 1992.
(11) In connection with the Common Stock Offering, the Company paid a special
dividend of $2.1 million to Loews with a portion of the proceeds. No other
cash dividends were paid during the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) in Item 8 of
this Report.
FORWARD-LOOKING STATEMENTS
When included in this Report, the words "expects," "intends," "plans,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, industry fleet capacity, changes in
foreign and domestic oil and gas exploration and production activity,
competition, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences and various other matters, many of which are beyond the Company's
control. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.
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RESULTS OF OPERATIONS
General
Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the dayrates received. Revenues can
also increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, the Company may
mobilize its rigs from one market to another. During periods of mobilization,
however, revenues may be adversely affected. As a response to changes in demand,
the Company may withdraw a rig from the market by stacking it or may reactivate
a rig which was previously stacked, which may decrease or increase revenues,
respectively.
Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues less costs incurred to mobilize an offshore rig
from one market to another are recognized over the term of the related drilling
contract. Revenues from offshore turnkey contracts are recognized on the
completed contract method, with revenues accrued to the extent of turnkey costs
until the specified turnkey depth and other contract requirements are met.
Operating Income (Loss). Operating income (loss) is primarily affected by
revenue factors, but is also a function of varying levels of operating expenses.
Operating expenses are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilization. For instance,
if a rig is to be idle for a short period of time, the Company realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. However, if the rig is to be idle for an
extended period of time, the Company may reduce the size of a rig's crew and
take steps to "cold stack" the rig, which lowers expenses and partially offsets
the impact on operating income associated with loss of revenues. The Company
recognizes as an operating expense maintenance activities such as painting,
inspections and routine overhauls that maintain rather than upgrade its rigs.
These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Increased depreciation expense decreases operating income in periods subsequent
to capital upgrades. From time to time, the Company sells assets in the ordinary
course of its business and gains or losses associated with such sales are
included in operating income (loss).
Merger with Arethusa. Effective April 29, 1996, the Arethusa Merger was
completed. Arethusa owned a fleet of 11 mobile offshore drilling rigs, operated
two additional mobile offshore drilling rigs pursuant to bareboat charters, and
provided drilling services worldwide to international and government-controlled
oil and gas companies. Because the Arethusa Merger was accounted for as a
purchase for financial reporting purposes, results of operations include those
of Arethusa from the effective date of the Arethusa Merger. See Note 2 to the
Company's Consolidated Financial Statements in Item 8 of this Report.
Industry Conditions. The Company's business and operations depend
principally upon the condition of the oil and gas industry and, specifically,
the exploration and production expenditures of oil and gas companies.
Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of low demand, excess rig supply and low
dayrates followed by periods of high demand, short rig supply and high dayrates.
The offshore contract drilling business is influenced by a number of factors,
including the current and anticipated prices of oil and natural gas, the
expenditures by oil and gas companies for exploration and production and the
availability of drilling rigs. Demand for drilling services remains dependent on
a variety of political and economic factors beyond the Company's control,
including worldwide demand for oil and natural gas, the ability of OPEC to set
and maintain production levels and pricing, the level of production of non-OPEC
countries and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves.
Years Ended December 31, 1996 and 1995
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its turnkey operations and intercompany
expenses charged to rig operations). Certain amounts applicable to the prior
14
17
periods have been reclassified to conform to the classifications currently
followed. Such reclassifications do not affect earnings.
During September 1996, the Company completed its major upgrade of the Ocean
Quest, expanding the rig to have fourth-generation capabilities. Upon
completion, the Ocean Quest is included in Fourth-Generation Semisubmersibles
for discussion purposes (prior period information will continue to include the
rig in Other Semisubmersibles). The Company's drillship, Ocean Clipper I, is
included in Other Semisubmersibles for discussion purposes.
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1996 1995 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
REVENUES
Fourth-Generation Semisubmersibles............. $112,022 $ 67,393 $ 44,629
Other Semisubmersibles......................... 341,163 168,582 172,581
Jack-ups....................................... 122,503 68,829 53,674
Turnkey........................................ 32,798 27,121 5,677
Land........................................... 22,675 19,926 2,749
Other.......................................... -- 4 (4)
Eliminations................................... (19,731) (15,271) (4,460)
-------- -------- --------
Total Revenues......................... $611,430 $336,584 $274,846
======== ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles............. $ 37,512 $ 34,717 $ 2,795
Other Semisubmersibles......................... 191,937 129,795 62,142
Jack-ups....................................... 85,149 60,798 24,351
Turnkey........................................ 30,344 30,297 47
Land........................................... 19,631 17,899 1,732
Other.......................................... (865) 3,011 (3,876)
Eliminations................................... (22,054) (16,957) (5,097)
-------- -------- --------
Total Contract Drilling Expense........ $341,654 $259,560 $ 82,094
======== ======== ========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles............. $ 74,510 $ 32,676 $ 41,834
Other Semisubmersibles......................... 149,226 38,787 110,439
Jack-ups....................................... 37,354 8,031 29,323
Turnkey........................................ 2,454 (3,176) 5,630
Land........................................... 3,044 2,027 1,017
Other.......................................... 865 (3,007) 3,872
Eliminations................................... 2,323 1,686 637
General and Administrative Expense............. (15,640) (13,857) (1,783)
Depreciation and Amortization Expense.......... (75,767) (52,865) (22,902)
Gain on Sale of Assets......................... 35,122 1,349 33,773
-------- -------- --------
Total Operating Income................. $213,491 $ 11,651 $201,840
======== ======== ========
Revenues. The $44.6 million increase in revenues from fourth-generation
semisubmersibles resulted from improvements in dayrates ($26.5 million) and
increases in utilization ($18.1 million). The improvement in utilization for
1996 was partially attributable to the relocation of two fourth-generation rigs
during the prior year, reducing the days worked for these rigs during that
period. The $172.6 million increase in revenues from other semisubmersibles was
primarily attributable to $90.9 million of revenues from the eight
semisubmersibles acquired in the Arethusa Merger and increases in dayrates in
both the North Sea and the Gulf of Mexico. The $53.7 million increase in
revenues from jack-ups resulted primarily from revenues associated with rigs
acquired in the Arethusa Merger and improvements in dayrates in the Gulf of
Mexico. The
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$5.7 million increase in turnkey revenues resulted from an increase in project
management service revenue during 1996 as compared to the prior year.
Contract Drilling Expense. Contract drilling expense for fourth-generation
semisubmersibles increased $2.8 million primarily due to the major upgrade of
the Ocean Quest which, upon completion in September 1996, is included as a
fourth-generation semisubmersible as compared to the prior year. The $62.1
million increase for other semisubmersibles resulted from the additional rigs
acquired in the Arethusa Merger, increased expenses for shipyard repairs on
three rigs, and increased expenses attributable to improved utilization during
1996. These increases were partially offset by a reduction in local payroll
expenses resulting from the relocation of a rig and decreased expenses for a rig
undergoing a major upgrade during 1996. The $24.4 million increase in jack-up
expense resulted primarily from the rigs acquired in the Arethusa Merger,
partially offset by decreased operating expenses for two rigs which were cold
stacked during 1996 (one of which was sold in July 1996). Turnkey expense was
relatively unchanged from the prior year. Other contract drilling expense
decreased $3.9 million primarily due to collections from a settlement in
connection with a lawsuit and collections on accounts receivable written off in
the prior year.
General and Administrative Expense. General and administrative expense of
$15.6 million for the year ended December 31, 1996 increased due to the Arethusa
Merger; however, these increases were partially offset by cost savings in rent
due to the February 1996 purchase of the building in which the Company has its
corporate headquarters. In addition, approximately $.8 million of general and
administrative expense associated with the major upgrades of the Ocean Quest,
the Ocean Star, the Ocean Victory and the Ocean Clipper I was capitalized to
these projects during 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense of $75.8 million for the year ended December 31, 1996 increased
primarily due to additional expense for (i) the eight semisubmersibles and three
jack-up drilling rigs acquired in the Arethusa Merger, (ii) goodwill
amortization expense associated with the Arethusa Merger, (iii) three rig
upgrades completed in 1995, and (iv) capital expenditures associated with the
Company's continuing rig enhancement program. Partially offsetting these
increases was a change in accounting estimate to increase the estimated useful
lives for certain classes of rigs. This change reduced depreciation expense by
approximately $8.5 million, as compared to the year ended December 31, 1995.
Gain on Sale of Assets. Gain on sale of assets for the year ended December
31, 1996 consists primarily of the sale of all of the operational assets of
Diamond M Onshore, Inc., a wholly-owned subsidiary of the Company, to Drillers,
Inc. resulting in a gain of $24.0 million. In addition, the Company sold two
shallow water jack-up drilling rigs, the Ocean Magallanes and the Ocean
Conquest, and one semisubmersible, the Ocean Zephyr II, resulting in gains
totaling $10.8 million.
Interest Expense. Interest expense of $2.3 million for the year ended
December 31, 1996 primarily consists of $2.2 million to expense origination
costs, including costs previously capitalized, in connection with the
restructuring of the Company's Credit Facility during December 1996. The
decrease from $27.1 million for the prior year was attributable to a reduction
in outstanding indebtedness resulting from the repayment of the Company's loan
from Loews in connection with the Common Stock Offering. In addition, interest
costs associated with the Company's financing arrangements were capitalized with
respect to qualified construction projects during 1996. See Notes 3 and 5 to the
Company's Consolidated Financial Statements in Item 8 of this Report.
Income Tax (Expense) Benefit. Income tax (expense) benefit for the year
ended December 31, 1996 was $(66.3) million as compared to $6.8 million for the
prior year. This change resulted primarily from the increase of $226.5 million
in the Company's income before income tax expense, partially offset by the
recognition of benefits for utilization of net operating losses in a foreign
jurisdiction in 1996. In addition, during the year ended December 31, 1995, the
Company's tax benefit reflected the effects of profits in foreign jurisdictions
where the Company's tax liability was minimal. See Note 11 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
16
19
Net Income (Loss). Net income (loss) for the year ended December 31, 1996
increased $153.4 million to $146.4 million, as compared to $(7.0) million for
the prior year. The increase resulted primarily from an increase in operating
income of $201.8 million and a decrease in interest expense of $24.7 million,
partially offset by an increase in income tax expense of $73.1 million.
Years Ended December 31, 1995 and 1994
Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset dayrate revenues earned
when the Company's rigs are utilized in its turnkey operations and intercompany
expenses charged to rig operations). Certain amounts applicable to the prior
periods have been reclassified to conform to the classifications currently
followed. Such reclassifications do not affect earnings.
YEAR ENDED
DECEMBER 31,
-------------------- INCREASE/
1995 1994 (DECREASE)
-------- -------- ----------
(IN THOUSANDS)
REVENUES
Fourth-Generation Semisubmersibles............... $ 67,393 $ 46,862 $ 20,531
Other Semisubmersibles........................... 168,582 134,302 34,280
Jack-ups......................................... 68,829 89,883 (21,054)
Turnkey.......................................... 27,121 25,296 1,825
Land............................................. 19,926 21,443 (1,517)
Other............................................ 4 11 (7)
Eliminations..................................... (15,271) (9,879) (5,392)
-------- -------- --------
Total Revenues........................... $336,584 $307,918 $ 28,666
======== ======== ========
CONTRACT DRILLING EXPENSE
Fourth-Generation Semisubmersibles............... $ 34,717 $ 30,207 $ 4,510
Other Semisubmersibles........................... 129,795 124,090 5,705
Jack-ups......................................... 60,798 66,723 (5,925)
Turnkey.......................................... 30,297 25,957 4,340
Land............................................. 17,899 18,240 (341)
Other............................................ 3,011 1,581 1,430
Eliminations..................................... (16,957) (9,879) (7,078)
-------- -------- --------
Total Contract Drilling Expense.......... $259,560 $256,919 $ 2,641
======== ======== ========
OPERATING INCOME (LOSS)
Fourth-Generation Semisubmersibles............... $ 32,676 $ 16,655 $ 16,021
Other Semisubmersibles........................... 38,787 10,212 28,575
Jack-ups......................................... 8,031 23,160 (15,129)
Turnkey.......................................... (3,176) (661) (2,515)
Land............................................. 2,027 3,203 (1,176)
Other............................................ (3,007) (1,570) (1,437)
Eliminations..................................... 1,686 -- 1,686
General and Administrative Expense............... (13,857) (11,993) (1,864)
Depreciation Expense............................. (52,865) (55,366) 2,501
Gain on Sale of Assets........................... 1,349 1,736 (387)
-------- -------- --------
Total Operating Income (Loss)............ $ 11,651 $(14,624) $ 26,275
======== ======== ========
Revenues. The $20.5 million increase in revenues from fourth-generation
semisubmersibles resulted primarily from increases in dayrates in the North Sea
and the Gulf of Mexico. In addition, $3.9 million in revenue resulting from
amortization of lump-sum payments, including mobilization fees in excess of
mobilization costs, was recognized during 1995. These increases were partially
offset by a reduction of revenues resulting from the mobilization between
markets of two fourth-generation rigs during the first quarter of 1995. The
$34.3 million increase in revenues from other semisubmersibles is primarily
attributable to increases in dayrates and utilization in both the North Sea and
the Gulf of Mexico. The operations of two of
17
20
three rigs acquired during the second and third quarters of 1994 contributed a
$6.0 million increase in other semisubmersible revenue. In addition, revenues of
$2.5 million resulting from amortization of a lump-sum payment were recognized
during 1995. These increases were partially offset by a reduction of revenues
resulting from the mobilization between markets of three other semisubmersibles:
the Ocean Nomad from South America to the North Sea, the Ocean Princess from
Southeast Asia to the North Sea, and the Ocean Baroness from Trinidad to Brazil.
The $21.1 million decrease in revenues from jack-ups resulted from cold stacking
two rigs located in the Gulf of Mexico in mid-1995, both of which were utilized
during the prior year, coupled with lower dayrates as compared to 1994.
Partially offsetting these decreases was an increase in utilization for two
jack-ups which were moved from Venezuela to the Gulf of Mexico during the first
half of 1994. The $1.8 million increase in turnkey revenues resulted from an
increase in the number of turnkey wells drilled. Eleven turnkey wells were
drilled during the year ended December 31, 1995 as compared to nine wells
drilled during the prior year. The $1.5 million decrease in land revenues
resulted primarily from a decline in utilization as compared to 1994.
Contract Drilling Expense. The $4.5 million increase in contract drilling
expense for fourth-generation semisubmersibles resulted from improved
utilization of the two rigs located in the Gulf of Mexico and increased expenses
for the mobilization of two rigs during the first quarter of 1995 to relocate
the rigs between the Gulf of Mexico and the North Sea. The $5.7 million increase
in contract drilling expense for other semisubmersibles resulted primarily from
additional operating costs of $9.4 million associated with the three rigs
acquired in 1994, including mobilization costs of $4.0 million. In addition,
improved utilization for a rig operating in the North Sea resulted in a $2.3
million increase in operating costs. These increases were partially offset by
cost reductions of $5.7 million from the cold stacking of two rigs located in
the Gulf of Mexico. One of these semisubmersibles, the Ocean Prospector, was
cold stacked in the first quarter and reactivated during the fourth quarter of
1995. The other rig, the Ocean Quest, was cold stacked in the third quarter of
1994 and, in 1995, was undergoing significant rig enhancements in preparation
for a three-year term contract. The $5.9 million decrease in contract drilling
expense for jack-ups resulted primarily from cost reductions associated with the
cold stacking of two rigs in the Gulf of Mexico. The $4.3 million increase in
turnkey expense resulted primarily from the increase in the number of turnkey
wells drilled and cost overruns on one turnkey well in progress at December 31,
1995, for which an estimated loss of $3.6 million was recorded.
General and Administrative Expense. General and administrative expense
increased $1.9 million in 1995 due to increases in staff and other
administrative expenses and the commencement in 1995 of the Diamond Offshore
Management Bonus Program, an incentive plan for cash bonuses to selected
officers and key employees of the Company.
Depreciation Expense. Depreciation expense of $52.9 million for 1995
included a $2.1 million write-down in the carrying value of a semisubmersible,
as compared to a $5.5 million write-down on another semisubmersible included in
depreciation expense for 1994. Partially offsetting this decrease was an
additional $1.2 million of depreciation expense associated with the three rigs
acquired during the second and third quarters of 1994.
Gain on Sale of Assets. Gain on sale of assets for the year ended December
31, 1995 of $1.3 million resulted from the sale of a semisubmersible which was
held for disposition and from sales of miscellaneous assets. Gain on sale of
assets for the year ended December 31, 1994 of $1.7 million primarily resulted
from the sale of eight land drilling rigs.
Interest Expense. Interest expense for the year ended December 31, 1995
decreased $4.2 million to $27.1 million as compared to $31.3 million for the
prior year. This decrease resulted from the repayment of all of the Company's
outstanding indebtedness to Loews in connection with the Common Stock Offering.
See Note 3 to the Company's Consolidated Financial Statements in Item 8 of this
Report.
Foreign Currency Transaction Losses. Foreign currency transaction losses of
$.2 million for 1995 decreased $1.1 million from $1.3 million for 1994. This
decrease was primarily due to a loss of $.7 million recognized in 1994 for the
accumulated translation adjustment upon discontinuance of operations in
Venezuela. See "-- Other -- Currency Risk".
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21
Other Income. Other income increased $.9 million to $1.8 million as
compared to $.9 million for 1994. This increase was primarily attributable to
additional interest income resulting from an increase in average cash balances
during 1995.
Income Tax Benefit. Income tax benefit for the year ended December 31, 1995
decreased $4.8 million to $6.8 million, as compared to $11.6 million for 1994.
This decrease resulted primarily from a decrease in the Company's net loss
before income tax benefit of $32.6 million, as compared to 1994. See Note 11 to
the Company's Consolidated Financial Statements in Item 8 of this Report.
Net Loss. Net loss for 1995 decreased $27.8 million to $7.0 million, as
compared to $34.8 million for 1994. The decrease resulted primarily from an
increase in operating income of $26.3 million.
OUTLOOK
The deep water and harsh environment markets for semisubmersible rigs have
experienced improved demand and higher dayrates during the past two years, due
in part to the increasing impact of technological advances, including 3-D
seismic, horizontal drilling, and subsea completion procedures. Both the Gulf of
Mexico and the North Sea semisubmersible markets have experienced increased
utilization and significantly higher dayrates since 1995. All of the Company's
markets have experienced increased utilization and higher dayrates in 1996, and
customers increasingly are seeking to contract rigs for a stated term (as
opposed to contracts for the drilling of a single well or a group of wells). In
1996, average operating dayrates earned by the Company's fourth-generation and
other semisubmersible rigs increased 39 percent and 43 percent, respectively,
from those earned during 1995. In addition, the Company's semisubmersible rigs
marketed and available for contract are essentially fully utilized and, of the
Company's 30 semisubmersibles, 25 have term commitments with renewal
opportunities staggered throughout 1997 and beyond.
The Company continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and harsh
environment operations. During September 1996, the Company completed the major
upgrade of the Ocean Quest and the rig began a three-year commitment. The rig,
which had been cold stacked in the Gulf of Mexico, now has fourth-generation
capabilities, including variable deckload of 6,000 long tons, a mooring system
to meet 3,500 foot water depth requirements, enhanced subsea equipment, and
upgraded drilling fluid systems. In March 1997, the Company completed the major
upgrade of the Ocean Star, including stability and other enhancements similar to
the Ocean Quest. The Ocean Victory, previously stacked in the North Sea, arrived
in the Gulf of Mexico in September 1996 and began modifications in connection
with its three-year deep water drilling program anticipated to begin during the
fourth quarter of 1997. In addition, the upgrade continues on the Ocean Clipper
I, which is anticipated to be completed in mid-1997.
The market for jack-up rigs continues to strengthen. In 1996, average
operating dayrates earned by the Company's jack-up fleet increased approximately
40 percent from those earned during 1995. The Company's marketed jack-up rigs in
the Gulf of Mexico are currently experiencing full utilization, although
contracts generally remain on a short-term or well-to-well basis. The Company
considers its upcoming contract expirations for these rigs typical of prevailing
market conditions. The Company's three international jack-ups and the jack-up
which the Company operates under bareboat charter are contracted for terms
expiring from May 1997 through February 1998.
Historically, the offshore contract drilling market has been highly
competitive and cyclical, and the Company cannot predict the extent to which
current conditions will continue. In addition, the recent improvement in the
current results of operations and prospects for the offshore contract drilling
industry as a whole has led to increased rig construction and enhancement
programs by the Company's competitors and, if present trends continue for an
extended period, may lead to new entrants into the market. A significant
increase in the supply of technologically advanced rigs capable of drilling in
deep water may have an adverse effect on the average operating dayrates for the
Company's rigs, particularly its more advanced semisubmersible units, and on the
overall utilization level of the Company's fleet. In such case, the Company's
results of operations would be adversely affected.
19
22
LIQUIDITY
Net cash provided by operating activities for the year ended December 31,
1996 increased by $155.0 million to $207.8 million, as compared to $52.8 million
for the prior year. This increase was primarily attributable to a $153.4 million
increase in net income, a $25.0 million increase in depreciation and
amortization expense, and a $14.5 million increase from changes in operating
assets and liabilities from 1995, partially offset by an increase of $33.8
million from gain on sale of assets. Cash used in investing activities increased
$135.2 million primarily due to $224.4 million of capital expenditures for rig
upgrades as compared to $19.0 million in 1995. This increase was partially
offset by $20.9 million of cash acquired in the Arethusa Merger and $40.6
million of proceeds from sales of assets. Cash provided by financing activities
for 1996 includes $73.0 million of net borrowings under the Company's financing
arrangements and $5.0 million of proceeds from the exercise of stock options
assumed in the Arethusa Merger. These increases were partially offset by $67.5
million of cash used in financing activities for repayment of debt assumed in
the Arethusa Merger. Cash provided by financing activities for 1995 consists of
the net proceeds from the Common Stock Offering, after repayment of the loans
from and the payment of a special dividend to Loews. See Note 3 to the Company's
Consolidated Financial Statements in Item 8 of this Report.
The Company has used funds available under the Credit Facility, together
with cash flow from operations, to fund its capital expenditure and working
capital requirements. The Credit Facility is a revolving line of credit for a
five-year term providing a maximum credit commitment of $200.0 million until
December 2001. As defined in the agreement, borrowings under the Credit Facility
bear interest, at the Company's option, at a per annum rate equal to the
Eurodollar Rate plus .500 percent until June 30, 1997, and thereafter plus .375
percent or a base rate (equal to the greater of (i) the prime rate announced by
the agent bank, (ii) the Federal Funds Effective Rate plus .500 percent or (iii)
the Adjusted Certificate of Deposit Rate plus .500 percent). The Company is
required to pay a commitment fee on the unused available portion of the maximum
credit commitment of .200 percent until June 30, 1997 and of .150 percent
thereafter. Borrowings are unsecured by mortgages or liens on, or pledges of,
assets, but are guaranteed by all of the Company's material domestic
subsidiaries. The Credit Facility also contains covenants that limit the amount
of total consolidated debt, require the maintenance of certain consolidated
financial ratios and limit dividends and similar payments. As of December 31,
1996, the Company was in compliance with each of these covenants. See Note 7 to
the Company's Consolidated Financial Statements in Item 8 of this Report.
In February 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent Notes due February 15,
2007. The Notes are convertible, in whole or in part, at the option of the
holder at any time following the date of original issuance thereof and prior to
the close of business on the business day immediately preceding the maturity
date, unless previously redeemed, into shares of Common Stock, at a conversion
price of $81 per share (equivalent to a conversion rate of 12.346 shares per
$1,000 principal amount of Notes), subject to adjustment in certain
circumstances. Interest on the Notes is payable in cash semi-annually on each
February 15 and August 15, commencing on August 15, 1997. Upon conversion, any
accrued interest will be deemed paid by the appropriate portion of Common Stock
received by the holder upon such conversion. The Notes are redeemable, in whole
or from time to time in part, at the option of the Company, at any time on or
after February 22, 2001 at specified redemption prices, plus accrued and unpaid
interest to the date of redemption. The Notes are general unsecured obligations
of the Company, subordinated in right of payment to the prior payment in full of
the principal and premium, if any, and interest on all indebtedness of the
Company for borrowed money, other than the Notes, with certain exceptions, and
effectively subordinated in right of payment to the prior payment in full of all
indebtedness of the Company's subsidiaries. The Notes do not restrict the
Company's ability to incur other indebtedness or additional indebtedness of the
Company's subsidiaries.
In management's opinion, the Company's cash generated from operations and
proceeds from the Notes are sufficient to meet its anticipated short and
long-term liquidity needs, including its capital expenditure requirements. The
Company's operating revenues and cash flows are primarily determined by average
operating dayrates and overall fleet utilization, which, in turn, are dependent
on the worldwide level of offshore oil and gas exploration and production
activity.
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23
CAPITAL RESOURCES
Cash requirements for capital commitments result from rig upgrades to meet
specific customer requirements and from the Company's continuing rig enhancement
program, including top-drive drilling system installations and water depth and
drilling capability upgrades. It is management's opinion that significant
improvements in operating cash flow resulting from current conditions of
improved dayrates and the increasing number of term contracts for rigs in
certain markets, in conjunction with proceeds from the Notes, will be sufficient
to meet these capital commitments. In addition, the Company may, from time to
time, issue debt or equity securities, or a combination thereof, to finance
capital expenditures or acquisitions of assets and businesses. The Company's
ability to effect any such issuance will be dependent on the Company's results
of operations, its current financial condition and other factors beyond its
control.
During the year ended December 31, 1996, the Company expended $224.4
million, including capitalized interest expense, for significant rig upgrades in
connection with contract requirements. The Company has budgeted $189.2 million
for capital expenditures on rig upgrades during 1997. Included in this amount is
approximately $162.5 million for expenditures in conjunction with the upgrades
of the Ocean Clipper I, the Ocean Star, and the Ocean Victory for deep water
drilling in the Gulf of Mexico. The Company sought to mitigate financial risk
associated with these projects by deferring commencement of the upgrades until
term commitments were secured with major integrated or large independent oil
companies with projected contract revenues substantially covering the upgrade
costs. The Company expects to evaluate other projects as opportunities arise.
Also, during the year ended December 31, 1996, the Company expended $42.6
million associated with its continuing rig enhancement program and other
corporate requirements, including $8.2 million to purchase the land and the
eight-story building in which the Company had leased office space for its
corporate headquarters. The Company has budgeted $70.7 million for 1997 capital
expenditures associated with its continuing rig enhancement program, spare
equipment and other corporate requirements.
The Company is continually considering potential transactions including,
but not limited to, enhancement of existing rigs, the purchase of existing rigs,
construction of new rigs and the acquisition of other companies engaged in
contract drilling. Certain of the potential transactions reviewed by the Company
would, if completed, result in its entering new lines of business, although, in
general, these opportunities have been related in some manner to the Company's
existing operations. For example, the Company has explored the possibility of
acquiring certain floating production systems, crew accommodation units and oil
service companies providing subsea products, technology and services, and
shipping assets such as oil tankers, through the acquisition of existing
businesses or assets or new construction. Although the Company does not, as of
the date hereof, have any commitment with respect to a material acquisition, it
could enter into such agreement in the future and such acquisition could result
in a material expansion of its existing operations or result in its entering a
new line of business. Some of the potential acquisitions considered by the
Company could, if completed, result in the expenditure of a material amount of
funds or the issuance of a material amount of debt or equity securities.
OTHER
Disposition of Assets. In December 1996, the Company sold all of the
operational assets of Diamond M Onshore, Inc., a wholly-owned subsidiary of the
Company, to Drillers, Inc. for approximately $26.0 million in cash. The assets
sold consisted of ten land drilling rigs, all of which were operating, 18
trucks, a yard facility in Alice, Texas and various other associated equipment.
In addition, the Company sold two shallow water jack-ups and one
semisubmersible, each of which was inactive.
Currency Risk. Certain of the Company's subsidiaries use the local currency
in the country where they conduct operations as their functional currency.
Currency environments in which the Company has material business operations
include the U.K., Australia and Brazil. The Company generally attempts to
minimize its currency exchange risk by seeking international contracts payable
in local currency in amounts equal to the Company's estimated operating costs
payable in local currency and in U.S. dollars for the balance of the contract.
Because of this strategy, the Company has minimized its unhedged net asset or
liability positions
21
24
denominated in local currencies and has not experienced significant gains or
losses associated with changes in currency exchange rates. However, at present
contracts covering three of the Company's four rigs operating in the U.K. sector
of the North Sea are payable in U.S. dollars. The Company has not hedged its
exposure to changes in the exchange rate between U.S. dollars and pounds
sterling for operating costs payable in pounds sterling, although it may seek to
do so in the future.
Currency translation adjustments are accumulated in a separate section of
stockholders' equity. When the Company ceases its operations in a currency
environment, the accumulated adjustments are recognized currently in results of
operations. During 1994, the Company recognized a loss of $.7 million for the
accumulated translation adjustment upon discontinuance of operations in
Venezuela. Additionally, translation gains and losses for the Company's
operations in Brazil have been recognized currently due to the hyperinflationary
status of this environment. The effect on results of operations has not been
material and is not expected to have a significant effect in the future due to
the recent stabilization of currency rates in Brazil.
Turnkey Operations. The Company, through DOTS, a wholly-owned subsidiary of
the Company, selectively engages in drilling services pursuant to turnkey
drilling contracts in which DOTS agrees to drill a well to a specified depth and
profitability of the contract depends upon its ability to keep expenses within
the estimates used by DOTS in determining the contract price. Drilling of a well
under a turnkey contract therefore typically requires a cash commitment by the
Company in excess of those drilled under conventional dayrate contracts and
exposes DOTS to risks of potential financial losses that generally are
substantially greater than those that would ordinarily exist when drilling under
a conventional dayrate contract. The financial results of a turnkey contract
depend upon the performance of the drilling unit, drilling conditions, and other
factors, some of which are beyond the control of DOTS. However, during 1996,
DOTS primarily provided project management services on a dayrate basis that are
not accompanied by the substantial risks of turnkey contracts. For the year
ended December 31, 1996, DOTS contributed $2.5 million of operating income to
the Company's consolidated results of operations.
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25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Diamond Offshore Drilling, Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of Diamond
Offshore Drilling, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Diamond Offshore Drilling, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 4, 1997
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26
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
----------------------
1996 1995
---------- --------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 28,180 $ 10,306
Short-term investments.................................... -- 5,041
Accounts receivable....................................... 172,214 74,496
Rig inventory and supplies................................ 30,407 15,330
Prepaid expenses and other................................ 12,166 10,601
---------- --------
Total current assets.............................. 242,967 115,774
DRILLING AND OTHER PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION.............................................. 1,198,160 502,278
GOODWILL, NET OF AMORTIZATION............................... 129,825 --
OTHER ASSETS................................................ 3,548 --
---------- --------
Total assets...................................... $1,574,500 $618,052
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 63,172 $ 32,765
Accrued liabilities....................................... 28,451 17,626
Taxes payable............................................. 26,377 1,860
Short-term borrowings..................................... 10,000 --
---------- --------
Total current liabilities......................... 128,000 52,251
LONG-TERM DEBT.............................................. 63,000 --
DEFERRED TAX LIABILITY...................................... 176,296 72,907
OTHER LIABILITIES........................................... 12,472 --
---------- --------
Total liabilities................................. 379,768 125,158
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $.01, 25,000,000 shares
authorized, none issued and outstanding).................. -- --
Common stock (par value $.01, 200,000,000 shares
authorized, 68,353,409 and 50,000,000 shares issued and
outstanding at December 31, 1996 and 1995,
respectively).......................................... 684 500
Additional paid-in capital................................ 1,220,032 665,107
Accumulated deficit....................................... (25,056) (171,444)
Cumulative translation adjustment......................... (928) (1,269)
---------- --------
Total stockholders' equity........................ 1,194,732 492,894
---------- --------
Total liabilities and stockholders' equity........ $1,574,500 $618,052
========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
24
27
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
REVENUES.................................................... $611,430 $336,584 $307,918
OPERATING EXPENSES:
Contract drilling......................................... 341,654 259,560 256,919
Depreciation and amortization............................. 75,767 52,865 55,366
General and administrative................................ 15,640 13,857 11,993
Gain on sale of assets.................................... (35,122) (1,349) (1,736)
-------- -------- --------
Total operating expenses.......................... 397,939 324,933 322,542
-------- -------- --------
OPERATING INCOME (LOSS)..................................... 213,491 11,651 (14,624)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (2,326) (27,052) (31,346)
Currency transaction losses............................... (28) (191) (1,316)
Other, net................................................ 1,568 1,789 861
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT........... 212,705 (13,803) (46,425)
INCOME TAX (EXPENSE) BENEFIT................................ (66,317) 6,777 11,621
-------- -------- --------
NET INCOME (LOSS)........................................... $146,388 $ (7,026) $(34,804)
======== ======== ========
NET INCOME PER SHARE........................................ $ 2.35
========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 62,231
========
PRO FORMA NET INCOME PER SHARE (NOTE 1)..................... $ 0.20
========
The accompanying notes are an integral part of the consolidated financial
statements.
25
28
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
---------- ------ ---------- ----------- ----------- -------------
DECEMBER 31, 1993............... 100 $ 1 $ 289,685 $(129,614) $(1,711) $ 158,361
Net loss...................... -- -- -- (34,804) -- (34,804)
Exchange rate changes, net.... -- -- -- -- 509 509
---------- ---- ---------- --------- ------- ----------
DECEMBER 31, 1994............... 100 1 289,685 (164,418) (1,202) 124,066
Net loss...................... -- -- -- (7,026) -- (7,026)
Capital contribution.......... -- -- 39,676 -- -- 39,676
350,500-for-one stock split... 35,049,900 350 (350) -- -- --
Issuance of common stock from
initial public offering..... 14,950,000 149 338,214 -- -- 338,363
Dividend to Loews............. -- -- (2,118) -- -- (2,118)
Exchange rate changes, net.... -- -- -- -- (67) (67)
---------- ---- ---------- --------- ------- ----------
DECEMBER 31, 1995............... 50,000,000 500 665,107 (171,444) (1,269) 492,894
Net income.................... -- -- -- 146,388 -- 146,388
Merger with Arethusa.......... 17,893,344 179 550,507 -- -- 550,686
Stock options exercised....... 460,065 5 4,418 -- -- 4,423
Exchange rate changes, net.... -- -- -- -- 341 341
---------- ---- ---------- --------- ------- ----------
DECEMBER 31, 1996............... 68,353,409 $684 $1,220,032 $ (25,056) $ (928) $1,194,732
========== ==== ========== ========= ======= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- --------
OPERATING ACTIVITIES:
Net income (loss)...................................... $ 146,388 $ (7,026) $(34,804)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 75,767 50,794 49,908
Write-down of asset................................. -- 2,071 5,458
Gain on sale of assets and other.................... (35,122) (1,349) (1,736)
Accrued interest converted to notes payable to
Loews............................................. -- 27,044 31,294
Deferred tax provision (benefit).................... 17,278 (7,472) (13,534)
Changes in operating assets and liabilities:
Accounts receivable................................. (64,715) (16,692) 4,458
Rig inventory and supplies and other current
assets............................................ (2,789) (4,896) (698)
Other assets, non-current........................... (1,747) -- --
Accounts payable and accrued liabilities............ 22,155 10,984 817
Taxes payable....................................... 46,149 (706) 638
Other liabilities, non-current...................... 4,093 -- --
Other, net............................................. 365 29 761
--------- --------- --------
Net cash provided by operating activities...... 207,822 52,781 42,562
--------- --------- --------
INVESTING ACTIVITIES:
Cash acquired in the merger with Arethusa.............. 20,883 -- --
Capital expenditures................................... (267,000) (66,646) (21,146)
Proceeds from sale of assets........................... 40,589 1,516 2,486
Change in short-term investments....................... 5,041 (115) 95
Acquisition of drilling rigs and related equipment..... -- -- (25,000)
--------- --------- --------
Net cash used in investing activities.......... (200,487) (65,245) (43,565)
--------- --------- --------
FINANCING ACTIVITIES:
Net (repayments) borrowings (to) from Loews............ -- (331,245) 10,000
Proceeds from issuance of common stock................. -- 338,363 --
Dividend to Loews...................................... -- (2,118) --
Net borrowings on revolving line of credit............. 63,000 -- --
Short-term borrowings.................................. 10,000 -- --
Repayment of debt assumed in the merger with
Arethusa............................................ (67,477) -- --
Proceeds from stock options exercised.................. 5,016 -- --
--------- --------- --------
Net cash provided by financing activities...... 10,539 5,000 10,000
--------- --------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 17,874 (7,464) 8,997
Cash and cash equivalents, beginning of year........... 10,306 17,770 8,773
--------- --------- --------
Cash and cash equivalents, end of year................. $ 28,180 $ 10,306 $ 17,770
========= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
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DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Diamond Offshore Drilling, Inc. (the "Company") was incorporated in
Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation
of which the Company had been a wholly-owned subsidiary prior to the initial
public offering in October 1995 (the "Common Stock Offering"), owns 51.3 percent
of the outstanding common stock of the Company (see Note 3).
The Company, through wholly-owned subsidiaries, engages in the worldwide
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. The Company's fleet of 46 mobile offshore drilling rigs is one of the
largest in the world and includes the largest fleet of semisubmersible rigs
currently working in the world. The fleet is comprised of 30 semisubmersible
rigs, 15 jack-up rigs and one drillship.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany transactions and balances.
Cash and Cash Equivalents
All short-term, highly liquid investments that have an original maturity of
three months or less are considered cash equivalents.
Supplementary Cash Flow Information
Non-cash financing activities for the year ended December 31, 1996 included
$550.7 million for the issuance of 17.9 million shares of common stock and the
assumption of stock options for the purchase of 0.5 million shares in connection
with the merger between the Company and Arethusa (Off-Shore) Limited
("Arethusa"). Non-cash investing activities for the year ended December 31, 1996
included $532.9 million of net assets acquired in the merger with Arethusa (see
Note 2).
Non-cash financing activities for the year ended December 31, 1995 included
a capital contribution by Loews in September 1995 of $39.7 million which reduced
the outstanding debt to Loews. In addition, $27.0 million of interest expense
was accrued and included in the notes payable to Loews prior to such notes being
repaid with a portion of the proceeds from the Common Stock Offering (see Note
3). In connection with the Common Stock Offering, the tax sharing agreement with
Loews was terminated and all liabilities were settled by offsetting $50.9
million owed by Loews to the Company under the agreement against the notes
payable to Loews.
Non-cash financing activities for the year ended December 31, 1994 included
$31.3 million of interest expense accrued and included in the notes payable to
Loews.
Cash payments made for interest on long-term debt, including commitment
fees, and cash payments for U.S. income taxes were $3.5 million and $1.5
million, respectively, for the year ended December 31, 1996. No cash payments
for interest or U.S. income taxes were made in 1995 or 1994. Cash payments for
foreign income taxes were $2.4 million, $0.8 million, and $1.6 million for the
years ended December 31, 1996, 1995, and 1994, respectively.
Rig Inventory and Supplies
Inventories primarily consist of replacement parts and supplies held for
use in the operations of the Company. Inventories are stated at the lower of
cost or estimated value.
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Drilling and Other Property and Equipment
Drilling and other property and equipment is carried at cost. Maintenance
and repairs are charged to income currently while replacements and betterments
are capitalized. Costs incurred for major rig upgrades are accumulated in
construction work in progress, with no depreciation recorded on the additions,
until the month the upgrade is completed and the rig is placed into service.
Upon retirement or other disposal of fixed assets, the cost and related
accumulated depreciation are removed from the respective accounts and any gains
or losses are included in the results of operations.
Depreciation is provided on the straight-line method over the remaining
estimated useful lives from the date the asset is placed into service. The
Company believes that certain offshore drilling rigs, due to their upgrade and
design capabilities and their maintenance history, have an operating life in
excess of their depreciable life as originally assigned. For this reason, a
change in accounting estimate, effective January 1, 1996, increased the
estimated useful lives for certain classes of offshore drilling rigs. As
compared to the original estimate of useful lives, the effect of such change
reduced depreciation expense and increased net income for the year ended
December 31, 1996 by approximately $8.5 million and $5.5 million ($0.08 per
share), respectively. The estimated useful lives of the Company's offshore
drilling rigs, after the change in estimate, range from 10 to 25 years. Other
property and equipment is estimated to have useful lives ranging from 3 to 10
years.
Goodwill
Goodwill from the merger with Arethusa (see Note 2) is amortized on a
straight-line basis over 20 years. Amortization charged to operating expense
during the year ended December 31, 1996 totaled $4.5 million.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
In 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used be reported at
the lower of carrying amount or fair value. Assets to be disposed of and assets
not expected to provide any future service potential to the Company are recorded
at the lower of carrying amount or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial position
or results of operations.
Income Taxes
Taxable income (loss) of the Company and its domestic subsidiaries was
included in the consolidated U.S. federal income tax return of Loews and other
members of the Loews affiliated group for all taxable periods ending prior to
the Common Stock Offering. Thereafter, the taxable income (loss) of the Company
and its domestic subsidiaries is included in the consolidated U.S. federal
income tax return of the Company and its affiliated group.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Except for selective
dividends, the Company intends to reinvest the unremitted earnings of its
non-U.S. subsidiaries and postpone their remittance indefinitely. Thus, no
additional U.S. taxes have been provided on earnings of these non-U.S.
subsidiaries. The Company's non-U.S. income tax liabilities are based upon the
results of operations of the various subsidiaries in those jurisdictions in
which they are subject to taxation.
Revenue Recognition
Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. The net of
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mobilization fees received and costs incurred to mobilize an offshore rig from
one market to another is recognized over the term of the related drilling
contract. Absent a contract, mobilization costs are recognized currently.
Lump-sum payments received from customers relating to specific contracts are
deferred and amortized to income over the term of the drilling contract.
Income from offshore turnkey contracts is recognized on the completed
contract method, with revenues accrued to the extent of costs until the
specified turnkey depth and other contract requirements are met. Provisions for
future losses on turnkey contracts are recognized when it becomes apparent that
expenses to be incurred on a specific contract will exceed the revenue from the
contract.
Currency Translation
The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at year-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the Consolidated Balance Sheets in "Cumulative translation
adjustment." Currency transaction gains and losses are included in current
operating results. Additionally, translation gains and losses of subsidiaries
operating in hyperinflationary economies are included in operating results
currently.
Net Income Per Share
Net income per share for the Company is computed by dividing net income by
the weighted average number of shares outstanding during the respective period.
Pro Forma Net Income Per Share Data
As described in Note 3, after its initial public offering, the Company had
50.0 million shares of common stock outstanding. Assuming the Common Stock
Offering had occurred as of January 1, 1995, the Company would have recognized
net income of $10.0 million, or $0.20 per share, for 1995, after adjusting for
the after-tax effects of a reduction in interest expense.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.
2. MERGER WITH ARETHUSA
In April 1996, the Company acquired 100 percent of the stock of Arethusa
(the "Arethusa Merger"). Arethusa owned a fleet of 11 mobile offshore drilling
rigs, operated two additional mobile offshore drilling rigs pursuant to bareboat
charters and provided drilling services worldwide to international and
government-controlled oil and gas companies. The consideration consisted of the
following (in thousands):
Common stock issued to Arethusa shareholders................ $539,305
Arethusa stock options assumed.............................. 11,381
--------
Total equity consideration................................ $550,686
========
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33
The Company issued 17.9 million common shares to the Arethusa shareholders
based on an exchange ratio of .88 shares for each share of issued and
outstanding Arethusa common stock. The shares were valued for financial
reporting purposes at $30.14 based on a seven-day average of the closing price
of the Company's common stock at the time the Arethusa Merger was announced
(December 7, 1995). In addition to equity consideration, the Company has
incurred approximately $16.9 million of acquisition costs associated with the
Arethusa Merger.
The Arethusa Merger was accounted for as a purchase. The purchase price
included, at estimated fair value, current assets of $67.2 million, drilling and
other property and equipment of $505.5 million, and the assumption of current
liabilities of $19.0 million, other net long-term liabilities of $3.9 million,
and debt of $67.5 million. In addition, a deferred tax liability of $66.8
million was recorded primarily for the difference in the basis for tax and
financial reporting purposes of the net assets acquired. The excess of the
purchase price over the estimated fair value of net assets acquired amounted to
approximately $135.2 million, which has been accounted for as goodwill and is
being amortized over 20 years using the straight-line method. This purchase
price allocation is preliminary as the Company is awaiting additional
information concerning a litigation contingency which is disclosed in Note 8. If
it is subsequently determined that a liability is necessary for this litigation,
it would result in an increase in goodwill and goodwill amortization, resulting
in a decrease to operating income.
The accompanying Consolidated Statements of Operations reflect the
operating results of Arethusa since April 29, 1996, the effective date of the
Arethusa Merger. Pro forma consolidated operating results of the Company and
Arethusa for the year ended December 31, 1996 and 1995, assuming the acquisition
had been made as of January 1, 1996 and 1995, are summarized below:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenue..................................................... $667,543 $456,750
Net income.................................................. 153,409 (963)
Net income per share........................................ 2.26 (0.01)
The pro forma information for the years ended December 31, 1996 and 1995
includes adjustments for additional depreciation based on the fair market value
of the drilling and other property and equipment acquired and the amortization
of goodwill arising from the transaction. The pro forma information for the year
ended December 31, 1995 also includes adjustments for (i) the acquisition of the
Arethusa Yatzy by Arethusa, which occurred May 3, 1995, (ii) the sale of the
Treasure Stawinner by Arethusa, which occurred June 30, 1995, (iii) the dividend
and capital distribution declared by Arethusa on June 30, 1995 and paid July 28,
1995, (iv) the Company's initial public offering and, in connection therewith,
the use of the proceeds to repay all of the Company's then outstanding
indebtedness to Loews and to fund the payment of a special dividend to Loews,
and (v) interest expense for working capital borrowings, and commitment and
other fees, under a credit facility as if each had occurred at January 1, 1995.
The pro forma information is not necessarily indicative of the results of
operations had the transactions been effected on the assumed dates.
3. COMMON STOCK OFFERING
Pursuant to the Common Stock Offering, the Company sold 14,950,000 shares
of common stock, including 1,950,000 shares from an over-allotment option.
Subsequent to the Common Stock Offering, the exercise of the over-allotment
option and a 350,500-for-one stock split, which was effective immediately prior
to consummation of the Common Stock Offering, the Company had 50,000,000 shares
of common stock outstanding.
Proceeds from the Common Stock Offering were used to repay all of the
Company's then outstanding debt to Loews of $336.2 million and the remainder of
such proceeds was used to pay Loews a special dividend of $2.1 million. In
addition, pursuant to a termination and settlement agreement, all assets and
liabilities under
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the tax sharing agreement with Loews were settled by offsetting amounts owed by
Loews to the Company thereunder against notes payable to Loews.
4. SHORT-TERM INVESTMENTS
During 1996 and 1995, the Company was party to a pledge agreement with a
bank whereby the bank has or will extend various financial accommodations to or
for the account of the Company, including issuing letters of credit, entering
into foreign exchange contracts or permitting intra-day overdrafts. In
consideration of and as a condition precedent to the making of such financial
accommodations by the bank, the Company was required to maintain a pledged
collateral account in which the bank had a continuing security interest. As of
December 31, 1995, pursuant to such agreement, the Company had $5.0 million in
U.S. Treasury Bills deposited in a pledged collateral account. Beginning in
November 1996, the bank no longer required the maintenance of a pledged
collateral account.
5. DRILLING AND OTHER PROPERTY AND EQUIPMENT
Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
(IN THOUSANDS)
Drilling rigs and equipment................................. $1,332,980 $ 689,438
Construction work in progress............................... 116,770 19,016
Land and buildings.......................................... 13,154 3,655
Office equipment and other.................................. 8,181 6,300
---------- ---------
Cost...................................................... 1,471,085 718,409
Less accumulated depreciation............................... (272,925) (216,131)
---------- ---------
Drilling and other property and equipment, net............ $1,198,160 $ 502,278
========== =========
Construction Work in Progress
As of December 31, 1996, $64.8 million, $36.5 million and $15.4 million of
construction work in progress was related to the upgrades for the Ocean Star,
the Ocean Clipper I, and the Ocean Victory, respectively. As of December 31,
1995, $6.6 million and $3.2 million of construction work in progress was related
to the upgrades for the Ocean Quest and the Ocean Star, respectively, and the
remaining $9.2 million was related to upgrades to prepare the Ocean Baroness and
the Ocean Princess for contracts in Brazil and the North Sea, respectively.
For the year ended December 31, 1996, the Company capitalized interest cost
of $4.0 million in construction work in progress with respect to qualifying
construction projects.
Impairment of Assets
During 1995 and 1994, the Company recorded impairment losses of $2.1
million and $5.5 million, respectively, to decrease the carrying value of two
semisubmersible drilling rigs (one located in the Gulf of Mexico and the other
located in South America, both of which were sold in the fourth quarters of 1995
and 1996, respectively). The impairment losses, reflected in "Depreciation" in
the Consolidated Statements of Operations, reduced the carrying value of both
rigs to zero. Operating losses incurred by the rig located in the Gulf of Mexico
during the years ended December 31, 1995 and 1994 were not material. Operating
losses incurred by the rig located in South America during the years ended
December 31, 1996, 1995 and 1994 were approximately $0.4 million, $0.6 million
and $2.1 million, respectively. The Company did not record any impairment losses
for the year ended December 31, 1996.
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Disposition of Assets
During the year ended December 31, 1996, the Company sold all of the
operational assets of Diamond M Onshore, Inc., a wholly-owned subsidiary of the
Company, for approximately $26.0 million in cash which generated an after-tax
gain of $15.6 million, or $0.25 per share. The assets sold consisted of ten land
drilling rigs, all of which were operating, 18 trucks, a yard facility in Alice,
Texas and various other associated equipment.
In addition, two of the Company's shallow water jack-up drilling rigs (the
Ocean Magallanes and the Ocean Conquest) and a semisubmersible (the Ocean Zephyr
II), all of which had previously been stacked were sold during 1996 increasing
net income by $7.0 million, or $0.11 per share.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
------------------
1996 1995
------- -------
(IN THOUSANDS)
Personal injury and other claims............................ $18,629 $11,056
Payroll and benefits........................................ 8,336 6,346
Other....................................................... 1,486 224
------- -------
Total............................................. $28,451 $17,626
======= =======
7. LONG-TERM DEBT
In connection with the Arethusa Merger, the Company assumed long-term debt
(including the current portion) of $67.5 million on two credit agreements with a
group of banks. During May 1996, using cash acquired in the Arethusa Merger
supplemented by borrowings on the Company's revolving credit facility with a
group of banks (the "Credit Facility"), both Arethusa loans were repaid in full.
Interest expense includes interest for the period from the effective date of the
Arethusa Merger to the date of repayment of the loans and the payment of
breakage and penalty charges.
The Credit Facility is a revolving line of credit for a five-year term
expiring in 2001 which provides a maximum credit commitment of $200.0 million,
increased from $150.0 million in December 1996. The unused credit available
under the Credit Facility at December 31, 1996 was $137.0 million. Interest
expense on borrowings under the Credit Facility are capitalized to qualified
construction projects (see Note 5). The weighted average interest rate,
including commitment and arrangement fees, was 8.5 percent for the year ended
December 31, 1996. The Company is required, under the Credit Facility, to
maintain certain consolidated financial ratios and the Credit Facility places
certain limitations on dividends and similar payments. As of December 31, 1996,
the Company was in compliance with each of these covenants and the Company could
have declared and paid dividends of $25.0 million in the aggregate within the
limitations of the Credit Facility.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire
through the year 2000. Total rent expense amounted to $1.6 million, $1.5 million
and $1.5 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Minimum future rental payments under leases are approximately
$631,000, $245,000, $72,000 and $12,000 for the years 1997 through 2000,
respectively. There are no minimum future rental payments under leases after the
year 2000.
The Company is contingently liable as of December 31, 1996 and 1995 in the
amount of $22.6 million and $.8 million, respectively, under certain
performance, bid, and export bonds and bonds securing obligations in connection
with litigation. On the Company's behalf, banks have issued letters of credit
securing certain of these bonds.
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36
The survivors of a deceased employee of a subsidiary of the Company,
Diamond M Onshore, Inc., have sued such subsidiary in Duval County, Texas, for
damages as a result of the death of the employee. The plaintiffs have obtained a
judgment in the trial court for $15.7 million plus post-judgment interest. The
Company is vigorously prosecuting an appeal of the judgment. The Company has
received notices from certain of its insurance underwriters reserving their
rights to deny coverage on the Company's insurance policies in excess of $2.0
million for damages resulting from such lawsuit. Management believes that the
Company has complied with all conditions of coverage and expects that it will
ultimately be determined that the Company has insurance coverage for final
unappealable damages, if any, in the case. The Company has not established a
liability for such claim at this time.
A subsidiary of the Company is defending and indemnifying Zapata Off-Shore
Company and Zapata Corporation, pursuant to a contractual defense and
indemnification agreement, in a suit for tortious interference with contract and
conspiracy to tortiously interfere with contract. The plaintiffs seek $14.0
million in actual damages and unspecified punitive damages plus court costs,
interest and attorney's fees. The Company intends to vigorously defend the suit
and no liability has been established at this time.
Various other claims have been filed against the Company in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that the Company has established adequate reserves for any liabilities
that may reasonably be expected to result from these claims. In the opinion of
management, no pending or threatened claims, actions or proceedings against the
Company are expected to have a material adverse effect on the Company's
financial position or results of operations.
9. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable. The Company maintains cash and cash equivalents and certain other
financial instruments with various financial institutions. A loss would occur if
one or more of these institutions fails to perform according to the terms of its
agreements. The Company's periodic evaluations of the relative credit standing
of these financial institutions are considered in the Company's investment
strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the Company's customer
base. Since the market for the Company's services is the oil and gas industry,
this customer base consists primarily of major oil companies and independent oil
and gas producers. The Company provides allowances for potential credit losses
when necessary. No such allowances were deemed necessary for the years
presented. As of December 31, 1996 and 1995, the Company had no significant
concentrations of credit risk.
Fair Values
SFAS No. 107 "Disclosure about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of all financial instruments, both
assets and liabilities, for which it is practicable to estimate fair value. The
Company's financial instruments include short-term investments, accounts
receivable, short-term borrowings, and long-term debt. The carrying amounts of
the Company's financial instruments approximate fair value due to the nature of
such instruments. The estimated fair value amounts have been determined by the
Company using appropriate valuation methodologies and information available to
management as of December 31, 1996 and 1995. Considerable judgment is required
in developing these estimates, and accordingly, no assurance can be given that
the estimated values are indicative of the amounts that would be realized in a
free market exchange.
At December 31, 1995, the carrying amount of the Company's investment in
U.S. Treasury Bills was at fair value based upon the closing market prices
obtained from public sources. The Company believed it had the ability to hold
its fixed income investment until maturity; however, because the Company might
have sold
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37
its securities and reinvested the proceeds to take advantage of opportunities
generated by changing interest rates, the securities were classified as
available for sale.
10. RELATED PARTY TRANSACTIONS
The Company and Loews have entered into a services agreement which was
effective upon consummation of the Common Stock Offering (the "Services
Agreement") pursuant to which Loews agreed to continue to perform certain
administrative and technical services on behalf of the Company. Such services
include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice
and assistance with respect to preparation of tax returns and obtaining
insurance. Under the Services Agreement, the Company is required to reimburse
Loews for (i) allocated personnel costs (such as salaries, employee benefits and
payroll taxes) of the Loews personnel actually providing such services and (ii)
all out-of-pocket expenses related to the provision of such services. The
Services Agreement may be terminated at the Company's option upon 30 days'
notice to Loews and at the option of Loews upon six months' notice to the
Company. In addition, the Company has agreed to indemnify Loews for all claims
and damages arising from the provision of services by Loews under the Services
Agreement, unless due to the gross negligence or willful misconduct of Loews.
Prior to the Common Stock Offering, Loews provided such services at an allocated
rate. The Company was charged $.2 million, $.7 million and $.9 million by Loews
for these support functions during the years ended December 31, 1996, 1995 and
1994, respectively.
Subsequent to the Common Stock Offering, Loews provided the Company with a
$150.0 million revolving line of credit which was available until February 1996
when the Credit Facility was arranged. Borrowings under this line of credit were
to bear interest, at the Company's option, at a per annum rate equal to a base
rate (equal to the greater of (i) the prime rate announced by Bankers Trust
Company or (ii) the Federal Funds rate plus .50 percent) plus .25 percent or the
Eurodollar rate plus 1.25 percent. The line of credit was unsecured, had no
financial or restrictive covenants, and the Company was not required to pay a
commitment fee to Loews. As of December 31, 1995, there were no amounts
outstanding under this line of credit.
11. INCOME TAXES
Prior to the Common Stock Offering, the Company and its subsidiaries were
party to a tax sharing agreement with Loews and the Company provided a tax
provision calculated as if on a stand-alone basis for U.S. federal income tax
purposes. In conjunction with the Common Stock Offering, the tax sharing
agreement was terminated and all assets and liabilities were settled by
offsetting amounts owed by Loews to the Company under the agreement against
notes payable to Loews (see Note 3).
An analysis of the Company's income tax (expense) benefit is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- ------ -------
(IN THOUSANDS)
U.S. -- current....................................... $(44,950) $ -- $ --
U.S. -- deferred...................................... (17,278) 7,472 13,559
Non-U.S. -- current................................... (3,486) (489) (1,541)
Non-U.S. -- deferred.................................. -- -- (25)
State and other....................................... (603) (206) (372)
-------- ------ -------
Total....................................... $(66,317) $6,777 $11,621
======== ====== =======
35
38
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.......................... $ 18,686 $ 15,641
Investment tax credit carryforwards....................... 3,066 7,638
Worker's compensation accruals(1)......................... 4,562 2,971
Foreign tax credits....................................... 7,186 5,160
Other..................................................... 1,574 8,568
--------- ---------
Total deferred tax assets......................... $ 35,074 $ 39,978
--------- ---------
Deferred tax liabilities:
Depreciation and amortization............................. $(187,627) $ (98,401)
Non-U.S. deferred taxes................................... (7,796) (10,146)
Other..................................................... (11,385) (1,367)
--------- ---------
Total deferred tax liabilities.................... (206,808) (109,914)
--------- ---------
Net deferred tax liability...................... $(171,734) $ (69,936)
========= =========
- ---------------
(1) Reflected in "Prepaid expenses and other" in the Company's Consolidated
Balance Sheets.
The Company believes that it is probable that its deferred tax assets of
$35.1 million will be realized on future tax returns, primarily from the
generation of future taxable income through both profitable operations and
future reversals of existing taxable temporary differences. However, if the
Company is unable to generate sufficient taxable income in the future through
operating results, a valuation allowance will be required as a charge to
expense.
In connection with the Arethusa Merger and the purchase of Odeco Drilling
Inc. in 1992, the Company acquired net operating loss ("NOL") and investment tax
credit ("ITC") carryforwards available to offset future taxable income. For the
year ended December 31, 1996, the Company utilized $53.2 million of such
carryforwards and has recorded a deferred tax asset for the benefit of the
remaining NOL and ITC carryforwards available to be carried forward to future
years, including those generated subsequent to the Common Stock Offering. Such
carryforwards expire as follows:
TAX BENEFIT OF
NET OPERATING INVESTMENT
YEAR LOSSES TAX CREDITS
- ---- -------------- -----------
(IN THOUSANDS)
2003...................................................... $ -- $3,066
2006...................................................... 511 --
2007...................................................... 4,300 --
2008...................................................... 6,259 --
2009...................................................... 3,487 --
2010...................................................... 3,851 --
2011...................................................... 278 --
------- ------
Total..................................................... $18,686 $3,066
======= ======
36
39
The difference between actual income tax (expense) benefit and the tax
provision computed by applying the statutory federal income tax rate to income
(loss) before taxes is attributable to the following:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Income (loss) before income tax (expense) benefit:
U.S.............................................. $153,615 $(19,591) $(29,667)
Non-U.S.......................................... 59,090 5,788 (16,758)
-------- -------- --------
Worldwide........................................ $212,705 $(13,803) $(46,425)
======== ======== ========
Expected income tax (expense) benefit at federal
statutory rate................................... $(74,447) $ 4,831 $ 16,249
Non-U.S. income (loss):
Impact of taxation at different rates............ -- 1,270 1,716
Utilization of net operating loss
carryforwards................................. 6,843 -- --
Impact of non-U.S. losses for which a current tax
benefit is not available...................... (1,642) (1,004) (6,094)
Adjustment to prior year return.................... 1,737 -- --
State taxes and other.............................. 1,192 1,680 (250)
-------- -------- --------
Income tax (expense) benefit............. $(66,317) $ 6,777 $ 11,621
======== ======== ========
Undistributed earnings of non-U.S. subsidiaries for which no deferred
income tax provision has been made for possible future remittances totaled
approximately $66.5 million at December 31, 1996. Substantially all of this
amount represents earnings reinvested as part of the Company's ongoing business.
It is not practicable to estimate the amount of taxes that might be payable on
the eventual remittance of such earnings. On remittance, certain countries
impose withholding taxes that, subject to certain limitations, are then
available for use as tax credits against a U.S. tax liability, if any. The
Company also has certain income tax loss carryforwards in non-U.S. tax
jurisdictions to which it has assigned no value because of the uncertainty of
utilization of these carryforwards. Approximately $21.1 million of such
carryforwards were utilized during 1996.
12. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company maintains defined contribution retirement plans for its U.S.
and U.K. employees. The plan for U.S. employees (the "401(k) Plan") is designed
to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended
(the "Code"). Under the 401(k) Plan, each participant may elect to defer
taxation on a portion of his or her eligible earnings, as defined by the 401(k)
Plan, by directing the Company to withhold a percentage of such earnings. A
participating employee may also elect to make after-tax contributions to the
401(k) Plan. The Company contributes 3.75 percent of a participant's defined
compensation. For the years ended December 31, 1996, 1995 and 1994, the
Company's provision for contributions was $2.5 million, $2.4 million and $2.3
million, respectively.
The plan for U.K. employees provides that the Company contribute amounts
equivalent to the employee's contributions generally up to a maximum of 3
percent of the employee's defined compensation per year. For the years ended
December 31, 1996, 1995 and 1994, the Company's provision for contributions was
$.3 million, $.2 million and $.2 million, respectively.
In connection with the Arethusa Merger, the Company assumed Arethusa's
Profit Sharing Plan. The plan was established as a defined contribution
profit-sharing plan effective October 1, 1992 covering substantially all U.S.
citizens, U.S. permanent residents and third country national expatriates
employed by Arethusa Off-Shore Company, a wholly-owned subsidiary of Arethusa.
Participants could elect to make contributions by directing the Company to
withhold a percentage of their earnings. A participating employee
37
40
could also elect to make after-tax contributions to the plan. The Company
contributed 3.75 percent of a participant's defined compensation. The Company's
provision for such contributions for the year ended December 31, 1996 was $.3
million.
Effective January 1, 1997, the Company modified the 401(k) Plan by merging
the Company's existing plan with the Arethusa Profit-Sharing Plan. Under the
plan, participating employees may contribute a portion of their pre-tax
compensation, up to a maximum of 15 percent of compensation. In addition to the
3.75 percent Company contribution, the Company will match 25 percent of the
first 6 percent of each employee's compensation contributed, subject to a
vesting schedule which entitles the employee to a percentage of the matching
contributions depending on years of service.
Deferred Compensation and Supplemental Retirement Plan
Effective December 17, 1996, the Company adopted the Deferred Compensation
and Supplemental Executive Retirement Plan. The Company will contribute any
portion of the 3.75 percent of the base salary contribution to the 401(k) Plan
that cannot be contributed because of the limitations of sections 401(a)(17) and
415 of the Code, retroactively to 1992. Additionally, the plan provides that
participants may defer up to 10 percent of base compensation and/or up to 100
percent of any performance bonus. Participants in this plan are highly
compensated employees of the Company and are fully vested in all amounts paid
into the plan.
Pension Plan
The defined benefit pension plan, established by Arethusa effective October
1, 1992, was frozen on April 30, 1996. At that date, all participants were
deemed fully vested in the plan which covered substantially all U. S. citizens
and U. S. permanent residents who were employed by Arethusa. Benefits are
calculated and paid based on an employee's years of credited service and average
compensation at the date the plan was frozen using an excess benefit formula
integrated with social security covered compensation.
Pension costs are determined actuarially and funded as required by the
Code. The plan's assets are invested in cash and cash equivalents, equity
securities, government and corporate debt securities. As a result of freezing
the plan, no current year service cost was accrued.
The significant actuarial assumptions as of the plan's year end are set
forth in the following table:
SEPTEMBER 30,
1996
--------------
Discount Rate............................................... 7.5%
Expected long-term rate..................................... 9.0%
Compensation projection rate................................ N/A
The funded status is set forth in the following table:
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
Benefit obligation -- Vested................................ $(8,536)
-- Non-vested............................ N/A
-------
Accumulated benefit obligation.............................. (8,536)
Effect of compensation projection........................... N/A
-------
Projected benefit obligation................................ (8,536)
Plan assets at fair value................................... 10,119
-------
Plan assets in excess of projected benefit obligation....... 1,583
Unrecognized gain........................................... (195)
-------
Prepaid pension cost........................................ $ 1,388
=======
38
41
Net periodic pension credit includes the following components:
YEAR ENDED
SEPTEMBER 30,
1996
--------------
(IN THOUSANDS)
Service cost of benefits earned............................. $ --
Interest cost on projected benefit obligations.............. 259
Actual return on plan assets................................ (356)
-----
Net periodic pension credit................................. $ (97)
=====
13. GEOGRAPHIC AREA ANALYSIS AND MAJOR CUSTOMERS
The following table summarizes, by geographic area, operating revenues and
operating income (loss) for the years ended December 31, 1996, 1995 and 1994,
and identifiable assets at the end of those periods. Interarea revenues from
affiliates primarily represent intercompany charter revenues and are accounted
for based on the estimated fair market value of the services.
AUSTRALIA/
UNITED EUROPE/ SOUTHEAST SOUTH OTHER
STATES AFRICA ASIA AMERICA AREAS ELIMINATIONS TOTAL
-------- -------- ----------- -------- ------ -------------- ----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
Revenues from unaffiliated customers...... $384,708 $126,618 $ 65,335 $ 34,769 $ -- $ -- $ 611,430
Interarea revenues from affiliates........ 31,147 -- -- 1,921 6,156 (39,224) --
Operating income (loss)................... 192,765 14,621 (6,106) 6,055 6,156 -- 213,491
Identifiable assets....................... 1,108,761 197,948 101,093 166,698 -- -- 1,574,500
YEAR ENDED DECEMBER 31, 1995
Revenues from unaffiliated customers...... $213,998 $ 47,645 $ 53,113 $ 21,828 $ -- $ -- $ 336,584
Interarea revenues from affiliates........ 9,335 1,389 -- 1,460 4,563 (16,747) --
Operating income (loss)................... 25,488 (6,755) (7,675) (3,970) 4,563 -- 11,651
Identifiable assets....................... 386,282 165,277 36,705 29,788 -- -- 618,052
YEAR ENDED DECEMBER 31, 1994
Revenues from unaffiliated customers...... $203,198 $ 19,159 $ 57,129 $ 26,133 $2,299 $ -- $ 307,918
Interarea revenues from affiliates........ 9,446 12,739 -- 2,373 730 (25,288) --
Operating income (loss)................... (1,540) (7,802) 2,783 (9,174) 1,109 -- (14,624)
Identifiable assets....................... 366,575 125,773 48,059 47,751 -- -- 588,158
A substantial portion of the Company's assets are mobile, therefore asset
locations at the end of the period are not necessarily indicative of the
geographic distribution of the earnings generated by such assets during the
periods.
The assets located outside the U.S. include cash and cash equivalents of
$6.2 million, $1.3 million and $2.5 million at December 31, 1996, 1995 and 1994,
respectively.
The Company's customer base includes major and independent oil and gas
companies and government-owned oil companies. During the year ended December 31,
1996, two customers contributed 13.8 percent and 13.5 percent of total revenues.
During the year ended December 31, 1995, one customer contributed 16.5 percent
of total revenues. For the year ended December 31, 1994, no single customer
contributed more than 8.2 percent of total revenues.
14. SUBSEQUENT EVENTS
On February 4, 1997, the Company issued $400.0 million, including $50.0
million from an over-allotment option, of 3 3/4 percent convertible subordinated
notes (the "Notes") due February 15, 2007. The Notes are convertible, in whole
or in part, at the option of the holder at any time following the date of
original issuance thereof and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed, into shares
of the Company's common stock, at a conversion price of $81 per share
(equivalent to a conversion rate of 12.346 shares per $1,000 principal amount of
Notes), subject to adjustment
39
42
in certain circumstances. Interest on the Notes is payable in cash semi-annually
on each February 15 and August 15, commencing on August 15, 1997. Upon
conversion, any accrued interest will be deemed paid by the appropriate portion
of the common stock received by the holder upon such conversion. The Notes are
redeemable, in whole or from time to time in part, at the option of the Company,
at any time on or after February 22, 2001 at specified redemption prices, plus
accrued and unpaid interest to the date of redemption. The Notes are general
unsecured obligations of the Company, subordinated in right of payment to the
prior payment in full of the principal and premium, if any, and interest on all
indebtedness of the Company for borrowed money, other than the Notes, with
certain exceptions, and effectively subordinated in right of payment to the
prior payment in full of all indebtedness of the Company's subsidiaries. The
Notes do not restrict the Company's ability to incur other indebtedness or
additional indebtedness of the Company's subsidiaries.
Assuming both the issuance of the Notes and the Arethusa Merger (see Note
2) had occurred at the beginning of the year, pro forma net income would have
been approximately $146.3 million, or $2.15 per share, for the year ended
December 31, 1996. The pro forma information is not necessarily indicative of
the results of operations had the transactions been effected on January 1, 1996.
15. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years ended December
31, 1996 and 1995 is shown below. Per share information has not been provided
for periods prior to the Common Stock Offering.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Revenues.................................... $106,868 $146,983 $170,622 $186,957
Operating income............................ 25,696 46,614 57,520 83,661
Income before income tax expense............ 26,130 46,784 57,929 81,862
Net income.................................. 18,732 33,022 38,480 56,154
Net income per share........................ 0.37 0.53 0.56 0.82
1995
Revenues.................................... $ 70,760 $ 76,106 $ 91,716 $ 98,002
Operating income (loss)..................... (8,730) 56 11,572 8,753
Income (loss) before income tax benefit..... (16,861) (8,299) 3,003 8,354
Net income (loss)........................... (11,572) (2,770) 1,422 5,894
Pro forma net income per share(1)........... -- -- -- 0.13
- ---------------
(1) As described in Note 3, after its initial public offering, the Company had
50.0 million shares of common stock outstanding. Assuming the Common Stock
Offering had occurred at the beginning of the fourth quarter, the Company
would have recognized net income of $6.4 million, or $0.13 per share, after
adjusting for the after-tax effects of a reduction in interest expense.
40
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Part III has been omitted as Registrant intends
to file with the Securities and Exchange Commission not later than 120 days
after the close of its fiscal year a definitive Proxy Statement pursuant to
Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits
(1) Financial Statements
PAGE
----
Independent Auditors' Report................................ 23
Consolidated Balance Sheets................................. 24
Consolidated Statements of Operations....................... 25
Consolidated Statements of Stockholders' Equity............. 26
Consolidated Statements of Cash Flows....................... 27
Notes to Consolidated Financial Statements.................. 28
(2) Financial Statement Schedules
No schedules have been included herein because the information
required to be submitted has been included in the Company's Consolidated
Financial Statements or the notes thereto, or the required information
is inapplicable.
(3) Index of Exhibits...................................... 42
See Index of Exhibits for a list of those exhibits filed herewith,
which index also includes and identifies management contracts or
compensatory plans or arrangements required to be filed as exhibits to
this Form 10-K by Item 601(10)(iii) of Regulation S-K.
41
44
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
December 31, 1996.
(c) Index of Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 -- Plan of Acquisition among Diamond Offshore Drilling,
Inc., Diamond Offshore (USA) Inc. and AO Acquisition
Limited and Arethusa (Off-Shore) Limited dated February
9, 1996, as amended (incorporated by reference to
Exhibits 2.1 and 2.2 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).
2.2 -- Amalgamation Agreement between Arethusa (Off-Shore)
Limited and AO Acquisition Limited dated February 9, 1996
(incorporated by reference to Exhibit 2.3 of the
Company's Registration Statement No. 333-2680 on Forms
S-4/S-1).
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
3.2 -- By-laws of the Company, as amended (incorporated by
reference to Exhibits 3.2, 3.2.1 and 3.2.2 of the
Company's Registration Statement No. 333-2680 on Forms
S-4/S-1).
4.1 -- Indenture, dated as of February 4, 1997, between the
Company and Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.1 of the
Company's Current Report on Form 8-K filed February 11,
1997).
4.2 -- Supplemental Indenture, dated as of February 4, 1997,
between the Company and Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 4.2 of the
Company's Current Report on Form 8-K filed February 11,
1997).
10.1 -- Fee Agreement between the Company and Arethusa
(Off-Shore) Limited dated February 9, 1996, as amended
(incorporated by reference to Exhibits 10.1 and 10.2 of
the Company's Registration Statement No. 333-2680 on
Forms S-4/S-1).
10.2 -- Stockholder's Agreement among the Company, Loews and
Arethusa (Off-Shore) Limited dated February 9, 1996, as
amended (incorporated by reference to Exhibits 10.3 and
10.4 of the Company's Registration Statement No. 333-2680
on Forms S-4/S-1).
10.3 -- Stockholder's Agreement among the Company, Diamond
Offshore (USA) Inc., AO Acquisition Limited and the other
parties signatory thereto dated February 9, 1996, as
amended (incorporated by reference to Exhibits 10.5 and
10.6 of the Company's Registration Statement No. 333-2680
on Forms S-4/S-1).
10.4 -- Termination and Settlement Agreement dated October 10,
1995 between Loews and the Company (incorporated by
reference to Exhibit 10.1 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
1995).
10.5 -- Registration Rights Agreement dated October 16, 1995
between Loews and the Company (incorporated by reference
to Exhibit 10.2 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.6 -- Services Agreement dated October 16, 1995 between Loews
and the Company (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
10.7+ -- Agreement ("Rose Employment Agreement"), dated November
1, 1992, between the Company and Robert E. Rose
(incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement No. 33-95484 on Form
S-1).
10.8+ -- Amendment, dated December 27, 1995, to the Rose
Employment Agreement (incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
42
45
10.9*+ -- Diamond Offshore Management Bonus Program, as amended and restated, and dated as of
December 31, 1996.
10.10*+ -- Diamond Offshore Executive Deferred Compensation and Supplemental Retirement Plan
effective December 17, 1996.
10.11 -- Credit Agreement among the Company, various lending institutions, Bankers Trust Company
and Christiana Bank og Kreditkasse, New York Branch, as Co-Arrangers, Bankers Trust
Company, as Administrative Agent, Christiana Bank og Kreditkasse, New York Branch, as
Documentation Agent, and The Fuji Bank, Limited, as Co-Agent, dated as of February 8,
1996 and amended and restated as of March 27, 1996 and further amended and restated as
of December 19, 1996 (incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement No. 333-19987 on Form S-3).
10.12 -- Diamond Offshore Drilling, Inc. Nonqualified Stock Option Plan for Certain Former
Directors of Arethusa (incorporated by reference to Exhibit 10.17 of the Company's
Registration Statement No. 333-2680 on Forms S-4/S-1).
10.13 -- Diamond Offshore Drilling, Inc. Stock Option Plan for Certain Former Employees of
Arethusa (incorporated by reference to Exhibit 10.18 of the Company's Registration
Statement No. 333-2680 on Forms S-4/S-1).
10.14 -- Asset Purchase Agreement between Diamond M Onshore, Inc. and Drillers, Inc. dated as of
November 12, 1996 (incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement No. 333-19987 on Form S-3).
10.15 -- Amendment No. 1, dated as of December 31, 1996, to Asset Purchase Agreement between
Diamond M Onshore, Inc. and Drillers, Inc. dated as of November 12, 1996 (incorporated
by reference to Exhibit 10.3 of the Company's Registration Statement No. 333-19987 on
Form S-3).
12.1* -- Statement re Computation of Ratios.
21.1* -- List of Subsidiaries of the Company.
23.1* -- Consent of Deloitte & Touche LLP
24.1* -- Powers of Attorney.
27.1* -- Financial Data Schedule.
- ---------------
* Filed herewith.
+ Management contracts or compensatory plans or arrangements.
43
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 3, 1997.
DIAMOND OFFSHORE DRILLING, INC.
By: /s/ LAWRENCE R. DICKERSON
-----------------------------------
Lawrence R. Dickerson
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT E. ROSE* President, Chief Executive Officer March 3, 1997
- ----------------------------------------------------- and Director (Principal
Robert E. Rose Executive Officer)
/s/ LAWRENCE R. DICKERSON* Senior Vice President and Chief March 3, 1997
- ----------------------------------------------------- Financial Officer (Principal
Lawrence R. Dickerson Financial Officer)
/s/ GARY T. KRENEK* Controller (Principal Accounting March 3, 1997
- ----------------------------------------------------- Officer)
Gary T. Krenek
/s/ JAMES S. TISCH* Chairman of the Board March 3, 1997
- -----------------------------------------------------
James S. Tisch
/s/ HERBERT C. HOFMANN* Director March 3, 1997
- -----------------------------------------------------
Herbert C. Hofmann
*By:/s/ RICHARD L. LIONBERGER
------------------------------------------------
Richard L. Lionberger
Attorney in Fact
44
47
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
10.9*+ -- Diamond Offshore Management Bonus Program, as amended and restated, and
dated as of December 31, 1996.
10.10*+ -- Diamond Offshore Executive Deferred Compensation and
Supplemental Retirement Plan effective December 17, 1996.
12.1* -- Statement re Computation of Ratios.
21.1* -- List of Subsidiaries of the Company.
23.1* -- Consent of Deloitte & Touche LLP
24.1* -- Powers of Attorney
27.1* -- Financial Data Schedule.
- ---------------
* Filed herewith.
+ Management contracts or compensatory plans or arrangements.